Mark Zuckerberg said his company was going all in on the metaverse last year. On Wednesday, he showed the costs of making that transition.
Meta, the company that Zuckerberg founded as Facebook, said that its Reality Labs division, which makes virtual reality goggles, smart glasses and other yet-to-be-released products, lost more than $10 billion in 2021 as it built the business. Those products are key to Zuckerberg’s vision of the metaverse, a next generation of the internet where people would share virtual worlds and experiences across different software and hardware platforms.
It was the first time that Meta revealed the results of its hardware division. In the past, the company had not broken out those numbers because products like virtual reality headsets were a small part of its overall business, which is dependent on social networking and digital advertising. Investing $10 billion in the metaverse is more than five times the amount of money Facebook paid to purchase the Oculus VR business in 2014 and 10 times what it paid to buy Instagram in 2012.
The spending dragged down Meta’s quarterly profits, which fell 8 per cent to $10.3 billion in the three months ended in December from a year earlier, even as revenue rose 20 per cent to $33.7 billion over the same period. Wall Street analysts had predicted profit of $10.9 billion on revenue of $33.4 billion.
At the same time, Meta said its social networking businesses — such as Facebook and Instagram — were being buffeted by another shift made by a rival tech giant. Meta said it expected its financial performance to be hurt by Apple’s changes to its mobile operating system, in which the iPhone maker made it more difficult last year for apps to track iPhone users’ digital habits. The move has affected social networking companies because it has given them less data to use for serving people targeted ads. Meta said the changes would cost it about $10 billion in ad revenue this year.
The higher spending on the metaverse and the effect of Apple’s changes have combined to create a difficult transition period for Facebook as it transforms into Meta. The results were highly unusual for a company that for years has churned out stellar financial performances like clockwork, powering through scandals about privacy and misinformation and other toxic content. On Wednesday, in response to the earnings report, Meta’s shares plunged about 22 per cent in after-hours trading.
“It is time for a reality check on Meta’s position for the metaverse,” said Raj Shah, a technology analyst for Publicis Sapient, a digital consultancy firm. “The metaverse is a long way from being profitable or filling the gap in ad revenue after Apple’s policy change.”
In a call with investors after disclosing Meta’s results, Zuckerberg, Meta’s CEO, appeared to acknowledge the difficulties. “Although our direction is clear, it seems that our path ahead is not quite perfectly defined,” he said.
But he also defended the shift toward the metaverse and said his company had weathered challenges before. “Ultimately, our continued success relies on building products that people find valuable and that people want to use,” Zuckerberg said.
For years, Meta has tried to become less dependent on Apple, which holds the key to iPhone users, and to shift away from social networking controversies involving misinformation and hate speech. So in October, Zuckerberg announced that he planned for his company to take a new path toward the metaverse. He renamed Facebook as Meta. Since then, the company has embarked on a sweeping internal transformation, restructuring itself and pushing employees to join teams working on augmented reality and virtual reality.
Meta’s spending is unlikely to subside anytime soon, especially as it is in a full-throttled race against other technology giants to claim ground in the theoretical metaverse. Last month, when Microsoft said it was buying video game maker Activision Blizzard for nearly $70 billion, the software maker cited the deal as a building block for the metaverse, even though Activision does not produce virtual reality games. Google has been working on metaverse-related technology for years, and Apple has its own devices in the works.
At the same time, Meta’s wildly profitable businesses are in a period of change. Sheryl Sandberg, Meta’s chief operating officer, said on the call with investors Wednesday that Instagram was heavily promoting a video product called Reels, which competes with TikTok. While Reels is the biggest contributor to Instagram’s growth, it does not make as much money from ads as other Instagram products like Stories and the main photo feed.
In the call, Zuckerberg also pointed to the difficulties of competing with TikTok, which has grown increasingly popular with younger audiences. David Wehner, Meta’s chief financial officer, added that Apple’s iOS changes buoyed the ad business of Google, which is not dependent on Apple for advertising data.
Alphabet, Google’s parent company, on Tuesday reported a 36 per cent increase in profit and a 32 per cent jump in revenue in the last three months of 2021 from a year earlier.
Still, the number of users for Meta’s social networking apps continued to rise. Monthly active users of Facebook, Instagram, WhatsApp and other apps increased 9 per cent, to 3.59 billion in the quarter from a year earlier, the company said. The company added that more than 1 billion users interact with business accounts using services such as WhatsApp and Messenger every week.
Yet the main Facebook app appeared to hit a ceiling in at least some markets; during the quarter, the app lost 1 million users globally for the first time, down from the prior quarter.
Meta also announced plans to change its stock ticker so that its shares would trade under the symbol META, instead of FB, on the Nasdaq exchange.
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