Facebook parent Meta’s bet on the metaverse may never pay off

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Wednesday, February 9, 2022

Facebook parent Meta is making a risky bet on the metaverse

The hits keep coming for Facebook parent company Meta (FB). After a devastating earnings report last week, the company’s stock price has fallen off a cliff. On Tuesday the precipitous drop pushed Meta’s market cap below $600 billion, a sharp decline from when it closed above $1 trillion in June 2021.

Meta has been plagued by a trio of problems: Facebook is bleeding users; Apple’s (AAPL) iOS privacy changes make it tougher to target you with ads; and shiny new competitors like viral video app TikTok are enticing people away from the app their grandmother still uses.

To turn things around, CEO Mark Zuckerberg is banking on Meta’s massive investments in the metaverse, a series of interactive online worlds that became 2021’s biggest buzz word.

But there’s no guarantee those investments — which amount to more than $20 billion — will ever pay off. The metaverse is still in its infancy, and while it’s receiving a lot of hype, consumer interest could stall like it did with virtual reality before it.

If Zuckerberg’s plan does pan out, though, he could turn Meta into more than a mere social media giant.

Meta’s metaverse bet could revive user growth

The metaverse, as envisioned by tech giants like Meta, is a series of interconnected online worlds that let users do everything from chat with friends to surf the open ocean.

But the technology has yet to attract the masses. Take a tour of big-name metaverse spaces like Decentraland, and chances are you’ll see plenty of empty space where you’d think other users would be. The most successful metaverse companies include the likes of Roblox (RBLX) and Epic Games’ “Fortnite,” which allow users to play games, chat, and even watch concerts.

But Silicon Valley, and Wall Street, are betting the metaverse will be far more than that. Companies like Animoca, the parent company of the metaverse app Sandbox, hope users will access the metaverse to purchase clothes for their avatars, gamble cryptocurrencies, and see comedy shows with friends.

For its part, Meta aims to merge social media and the metaverse to let users live a kind of virtual life online. Zuckerberg envisions a metaverse where users can take the form of cartoon-style avatars and travel among virtual worlds unimpeded by the need to sign into different services and accounts.

It’s these kinds of experiences that Meta is banking on being its future growth engine. The company already sells its Quest 2 virtual reality headset, which gives users access to VR apps like “Beat Saber” as well as metaverse software like Meta’s Horizon Worlds virtual social platform.

So far sales of the Quest 2 have been strong, with the Oculus app hitting the top spot in Apple’s App Store during the holiday season, though exact sales numbers aren’t available. To date, Zuckerberg says users have spent more than $1 billion on Oculus content.

The company is also rolling out its Horizon metaverse platform to more computing platforms to expand its reach outside of headset owners. All of these services reflect Meta’s new focus on the metaverse, which it made abundantly clear with its name change in October.

“Clearly with the name change that Facebook made in October... they signaled in fact that they're going full force ahead on the metaverse,” Forrester research director Mike Proulx told Yahoo Finance. “They really do believe that that is the future way in which people will engage online. So that is a big bet that they're making.”

It’s not just Meta that’s hoping the metaverse pays off. According to crypto investment firm Grayscale, the metaverse is estimated to be a $1 trillion revenue opportunity across everything from advertising and virtual events to sales of headsets.

But so far, the metaverse is mostly for early adopters. According to an August survey of 1,263 adults in the U.S. and U.K conducted by Forrester, just 23% of U.S. consumers and 17% of U.K. consumers expressed any interest in entering the metaverse. Others said they had no interest in it or still don’t understand it.

What’s more, there’s no clear understanding of what the metaverse will actually turn out to be. We’re so early in the technology’s life that everything prognosticators like Zuckerberg pitch to the public could fall flat.

We’ve seen it before with technologies that were supposed to change the world. I’m looking at you, 3D TVs and Google Glass.

Building the metaverse will cost Meta billions

Getting users to understand and want to take part in the metaverse isn’t the only problem for Meta, though. Building out the technology itself will also be costly.

In Q4 alone, Meta spent $3.3 billion on its Reality Labs business, which works on everything from the hardware to the software needed to power the metaverse. But that pales in comparison to the more than $20 billion the company spent throughout all of 2020 and 2021 on Reality Labs.

What’s more, best estimates put a fully built-out metaverse that lives up to the expectations Zuckerberg set during his October press conference at least 10 years away.

And according to Wedbush analyst Dan Ives, it will take some time for Meta to actually turn a profit on the tech.

“Zuckerberg has major growth challenges ahead and metaverse monetization is still far off,” Ives said, adding that the company is likely to see “some dark days ahead.”

Even Zuckerberg admits that it’ll be some time before the company’s investments pay off. “This fully realized vision is still a ways off, and although the direction is clear, our path ahead is not perfectly defined,” he said during the company’s latest post-earnings conference call.

Despite that lack of clarity, Meta may have no choice but to reinvent itself. With stagnant user growth and increased competition from TikTok, Meta needs the metaverse to be everything Zuckerberg envisions. If it’s not, Facebook may just become as irrelevant as the social media sites like Friendster and MySpace that preceded it.

By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley

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