Facebook/Meta booted its quarter, missing estimates by a mile and saying some things that troubled investors. It’s a rare disappointment for the company, and why it happened and what Meta will do could create a major shift in the industry. Not surprisingly, the “what Meta will do” is likely to focus on the metaverse, and that alone has major ramifications, but metaverse is not the end of it.
Companies, in my experience, rarely confront their real issues head-on during earnings calls. They’ll say stuff that’s nibbling on the edge of real disclosure, but calculated to present the quarter in the best possible light. What I believe Meta is facing, in terms of its revenue growth and future, comes down to three factors.
The first of these is the fundamental weakness of depending on advertising as a revenue source. I’ve talked about the problems of ad sponsorship in prior blogs, but what it comes down to is that ad spending isn’t growing much, if at all, and so nobody can really hope to “win” without someone else losing. Meta’s revenue stream is inherently vulnerable, which means that they need to somehow escape what’s effectively total ad dependence.
The second factor is that Meta is built around a community concept whose upside is also limited. Social networking unquestionably exploded because of its novelty and its ability to extend engagements that were previously limited by the need to personally interact. It’s not novel any longer, and more and more users have hit the wall in terms of how much they can use the platform without interfering with their real-world life. This issue is particularly important for youth, and Meta cited that on their call. To get their community back, they need to get their novelty back.
Factor three is that Meta’s attempt to exploit the community for more revenue has alienated some, and attracted regulatory attention. You certainly don’t need whistleblowers discrediting your revenue strategy if you’re a CEO, and the fact is that many people (myself included) dropped everything Facebook long ago because of increased ad exploitation and content. You cannot synthesize truth by collecting the largest possible number of lies. Given that the community has to grow to support revenue growth, but that exploiting the community for revenue is likely to create pushback, this puts the company in the classic Catch-22. This means that Meta needs to break the vicious cycle of exploitation before they discredit themselves, leaving little room for recovery.
Where this leaves Meta, IMHO, is simple. They need to step beyond ads, create novelty, and either police their stuff better or at least make it appear that it’s not their problem to do so. The metaverse is a part of this, obviously, but I think there are other things we need to be watching for.
One is cryptocurrency, not just as a feature but as an on-ramp to a sell-something strategy. In many gaming applications, users buy what are essentially NFTs, and this requires a payment system. Everyone knows that Meta considered launching a cryptocurrency, but I think they finally realized that what they really needed was a way to sell something; how payment was handled is a secondary point. Metaverse offers three options for selling, NFTs and metaverse hosting, and “virtual retail”. They’re all interdependent.
Creating a workable metaverse is not a simple task, as some of my blogs on the topic should show. You need a considerable amount of distributed hosting and a network that connects your hosting points with little or no latency. You also need a boatload of cloud-native software that provides the functionality, of course. All of this stuff could be difficult or impossible for some would-be offers of a metaverse, not to mention very expensive. Meta could logically offer to host other metaverses, even allowing companies to create their own customer or supplier metaverse to be hosted by Meta.
NFTs and cryptocurrency wallets could be an important part of the features of a metaverse, and Meta could re-launch its own crypto idea or support a variety of currencies. They could also provide an NFT exchange for use by their metaverse hosting customers. Taking a cut, of course, of the action.
Something like this might also allow Meta to escape some of the regulatory backlash they’re seeing, and the pressure to suppress questionable content. If a third-party hosts a metaverse on Meta, is Meta any more responsible than if a cloud provider hosts an application? They could cover a lot of this in the terms of use for metaverse hosting.
As far as their own metaverse is concerned, Meta could turn it into virtually everything, including virtual online retail. Your avatar could to into a meta-store and look at a meta-product, and when they purchased (perhaps with meta-currency) they’d see the real thing delivered. A true virtual store. Meta could enter a lot of direct retail markets. They could frame virtual visits to doctors or other professionals as metaverse activity, again taking a cut. If virtual reality can be made realistic enough, then meta-retail (and wholesale, of course) could become the baseline strategy. Guess who could control a big piece of it?
Not everything is beer and roses for Meta, though. Microsoft, so current stories go, has bowed out of its HoloLens VR/AR glasses, which on the surface might be seen as a good thing for Meta. Maybe it is, but it’s also possible that Microsoft is less bowing out of AR than deferring it. They could believe that “immersive AR” is shooting way to far ahead of the opportunity duck; that realization of the metaverse opportunity demands getting something out there that can evolve. There are a lot of lower metaverse apples to pick, and Microsoft’s cloud position means they could gain a lot by picking a few.
Because it needs to grow its community, Meta needs something glitzy, and that takes time and technology. The fact that Meta has announced “personal distancing” limits to prevent AR groping in the metaverse is an indication that they do really intend to offer immersive, realistic, AR. Because of the latency challenges at the least, immersive AR could be a barrier to a quick realization of Meta’s goals, which might open the door for others.
Do you really need immersive AR to shop? Do you need it to collaborate, or to model a factory process? The short-term answer is that you do not, even though it might become a major asset in the longer term. What you do need is a cloud, though, which Microsoft has and Meta does not. They could become cloud customers, but I doubt that they’d want to surrender the margins on the services to a cloud provider. Given that the cost of creating a truly distributed, edge-hosted, immersive-AR metaverse would be formidable (as would the time required), Meta may have to focus initially on something less immersive, less realistic…at the risk of losing more users? Or maybe not.
The initial metaverse social framework will be novel in itself, even if it doesn’t yet have immersive AR. It would surely be broader-based, since most users won’t have AR glasses and since AR requirements would limit the extent to which social-metaverse usage could be mobile. Meta could roll the other stuff in later on, as technology improves and as the initial novelty fades, creating the need for a kicker.
This isn’t going to be an easy move for Meta, not the least because the company’s own culture has been arrogant and slow to accept the realities of their own market, including regulatory risks. They may need some leadership changes, even to the top, to make it work. Meanwhile, other companies could be in a better position to exploit Meta’s own signature concept.