Ruling the Metaverse proves to be a costly burden as Meta's growth goes into decline for the first time

Stuart Lauchlan Profile picture for user slauchlan July 28, 2022 Audio mode
Summary:
Meta is looking at a declining ads market and some brutal restructuring in the months ahead. But the Metaverse project is still a top priority for CEO Zuckerberg.

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Mark Zuckerberg’s ambitions to rule the Metaverse are putting a huge financial burden on The Company Formerly Known As Facebook just as advertising slows down and the firm reports its first ever - but probably not the last - revenue drop.

For Q2, Meta turned in total revenue of $28.82 billion, down from $29.08 billion a year earlier. Profits for the quarter came in at $6.7 billion, but that’s down over a third sequentially (36%) on Q1. As Zuckerberg noted with some understatement:

We seem to have entered an economic downturn.

This is coming from a variety of sources, according to outgoing COO Sheryl Sandberg:

Many of the macro factors having an impact on our revenue are continuations of things we've seen in previous quarters, such as the continued impact of the war in Ukraine and the normalization of e-commerce after the pandemic peak. But there are also new challenges with rising inflation and uncertainty around a looming recession.

None of this is going to go away any time soon, leading Zuckerberg to state:

It's always hard to predict how deep or how long these cycles will be, but I'd say that the situation seems worse than it did a quarter ago. In this environment, we're focused on making the long-term investments that will position us to be stronger coming out of this downturn, including our work on our discovery engine and Reels, our new ads infrastructure and the Metaverse. And we're also focused on being rigorous about measuring returns and sizing these investments correctly. 

Headcount reductions incoming 

What that means for Meta employees, already placed on ‘war footing’, is a period of cutbacks and redundancies. Zuckerberg said:

Our plan is to steadily reduce headcount growth over the next year.

He went on: 

Many teams are going to shrink so we can shift energy to other areas inside the company. And I want to give our leaders the ability to decide within their teams where to double down, where to backfill attrition and where to restructure teams while minimizing thrash to the long-term initiatives. The fact that we hired a lot of people earlier this year means that our reported year-over-year headcount growth will still be substantial for the next few quarters, but it should continue to decline over time. Now this is a period that demands more intensity, and I expect us to get more done with fewer resources.

But the Metaverse is safe

That said, he added:

I expect that we're going to find a way to keep investing in our top priority areas.

Reality Labs, the business unit responsible for the Metaverse, put a $2.8 billion loss onto the bottom line, although the sales of headsets pushed revenue for the division up 48% year-on-year to $452 million. While Zuckerberg talked about “slowing the pace of investments” in the face of the current fiscal climate, it’s clear that his pet project isn’t about to suffer as he explained on the post earnings analyst call:

The Metaverse is a massive opportunity for a number of reasons. Most importantly, it enables deeper social experiences, where you feel a realistic sense of presence with other people, no matter where they are. Whether you're playing games or working for hours at a time or if you're just jumping in for just a minute at a time to say hi to a friend or collaborate on a project quickly. By helping to develop these platforms, we're going to have the freedom to build these experiences the way that we and the overall industry believe will be best rather than being limited by the constraints that competitors place on us and on our community and on small businesses.

And given some of the product and business constraints that we face now, I feel even more strongly now that developing these platforms will unlock hundreds of billions of dollars, if not trillions over time. This is obviously a very expensive undertaking over the next several years. But as the metaverse becomes more important in every part of how we live from our social platforms and entertainment to work and education and commerce, I'm confident that we're going to be glad that we played an important role in building this. 

My take

It was left to Sandberg to come up with the rallying cry for the troops as she prepares to exit the business:

There's no doubt that we're going through a transition period and doing so at a time of global economic uncertainty. But despite the current challenges, I'm very confident for the long term.

We're facing a cyclical downturn but over the long run, the digital ad market will continue to grow. Advertisers will go where they get the highest return on investment and ability to drive their business. We believe we will continue to show up very favorably compared to other advertising options.

Meta is a company that has shown extraordinary resilience. We have demonstrated time and time again that we are prepared to move quickly and at scale to respond to changes in consumer behavior, the macroeconomic landscape, and the needs of our advertising partners. 

That’s all good and well, but the company she leaves behind is in a very difficult place. The ad decline isn’t something that can be placed directly at Meta’s door - see also Alphabet’s earnings this week - but it’s an enormous problem for the firm.

Apple came under fire for the impact its privacy regulations are having on Meta’s business model. It’s also been identified as the main competitive threat when it comes to building out Zuckerberg’s precious Metaverse. Fair enough - it’s always good to have an enemy in focus to rally the troops around.

And those troops are going to need some rallying. Zuckerberg’s comments about how many chins of his workforce need to shape up or ship out have been abrasive in the extreme. Glassdoor reviews of the working environment at Meta over the coming months are likely to make for interesting reading.

Funny to think that not that long ago the popular consensus was that the only thing that could tame Facebook (as it was) would be regulatory intervention. In fact, the market and an enduring focus on vanity projects might well end up doing the trick…

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