What Is Meta’s Future?
Facebook has a new name and a new purpose. Can they achieve the virtual metaverse? Will VR be the end of Meta?
On October 29, Mark Zuckerberg announced the rebranding of Facebook, the company, to Meta. The social media network will retain the name Facebook, but the parent company will change its name to distance itself from a toxic brand and potentially shift the company to a more virtual reality-focused future. Short for metaverse, a term coined from the Neal Stephenson book Snow Crash, Meta has ambitions beyond social media and into a future digitized world.
Facebook has had a run of negative news for the past month year decade. Just recently, the whistleblower accusations (covered by me, here) of Facebook management knowing of the detrimental effects of the application on youth mental health have been at the forefront of the media coverage. The company also had a several hour-long blackout and poor earnings guidance that led the stock to decline by almost 8% as of today since last Thursday.
Meta’s third-quarter earnings weren’t terrible, not bad enough for such a poor reaction from the market. It beat estimated per-share earnings by 1.32% but missed on revenue by -1.74%. The miss on revenue stung, but Facebook still exhibited a positive revenue trend growing year over year. The market is fearful of inflation and, in particular, an overbought stock market. Like most of the tech sector, overbought companies should expect fairly immediate stock pullbacks from revenue misses, as many currently trade far into future earnings.
Still, the revenue miss was hardly the worst of Facebook’s earnings call. During the call, the company detailed recent Apple advertising changes as the “largest factor in terms of Q3 headwinds.” CFO David Wehner said that without the new user opt-in on Apple devices, the company expected sequential growth in revenues. Facebook’s earnings mirrored Snap’s from the prior week when Snap reported lower forward guidance on revenue due to Apple’s advertising opt-in policy. Snap immediately plummeted by 20% and currently sits 27% off from before its earnings call.
“Our outlook reflects the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple’s iOS 14 changes, and macroeconomic and COVID-related factors. In addition, we expect non-ads revenue to be down year-over-year in the fourth quarter as we lap the strong launch of Quest 2 during last year’s holiday shopping season.” - Meta
As a reminder, Apple began prompting users beginning with iOS 14.5 to ask if they would like to opt-in to an applications advertising tracking. The policy went into effect on April 26, 2021, and essentially prevented applications from tracking user activity across different applications (i.e., Facebook could no longer track your purchases through the Amazon app). Since going into effect, the policy immediately resulted in a US consumer opt-in rate of merely 4% and a worldwide opt-in rate of 11%. The Apple advertising opt-in prompt is not going away and represents a definite speed bump that digital advertisers will have to traverse. Still, there are some positive signs that the opt-in rate is increasing as advertisers add functionality to user tracking.
Meta generates nearly all of its revenue from advertising; any loss of marketers or spending by marketers would seriously harm its business. Meta relies on the advertising revenue generated from targeting and measurement tools that incorporate data from users on websites and applications that Facebook has no control over.
“For example, in April 2021, Apple made certain changes to its products and data use policies in connection with changes to its iOS 14 operating system that reduce our and other iOS developers’ ability to target and measure advertising, which to some extent has negatively impacted, and we expect will continue to negatively impact, the size of the budgets marketers are willing to commit to us and other advertising platforms. In addition, we have implemented, and may continue to implement, product changes that give users the ability to limit our use of such data signals to improve ads and other experiences on our products and services, including our Off-Facebook Activity tool and our worldwide offering of certain product changes we implemented in connection with the GDPR. These developments have limited our ability to target and measure the effectiveness of ads on our platform and negatively impacted our advertising revenue. For example, our advertising revenue in the third quarter of 2021 was negatively impacted by marketer reaction to targeting and measurement challenges associated with iOS changes. If we are unable to mitigate these developments as they take further effect in the future, our targeting and measurement capabilities will be materially and adversely affected, which would in turn significantly impact our future advertising revenue growth.” - Meta
While significant, I do not think the Apple advertising changes are exceptionally substantial for Meta in a manner that will adversely impact the company much going forward. For one, Apple is the only platform instituting such a change, and two, opt-in rates should increase as tracking functionality increases for the consumer. This change seems like a short-term problem, although any regulation that could create a similar effect at the federal level would likely significantly curb Meta's growth.
Two other problems mentioned during the earnings call are potentially much more worrying for the future long-term growth of the company. First, the company acknowledged some issues the platform has with acquiring younger users. Second, Facebook seems to be betting big on the metaverse and virtual reality for the future.
Regarding attracting younger users, this has been an issue for Facebook’s namesake social media platform for a while. Facebook bought Instagram for this exact reason: to corner the youth demographic because, at present, Facebook is the only social media site in the top six most frequented in America where Gen Z not only does not rank first in polled usage but ranks below millennials and boomers. Facebook is still one of the most dominant social mediums for those ages 18-29, only 2nd to Instagram, but Facebook has issues recently keeping the youth demographic.
Earlier in 2021, a researcher at Facebook shared some alarming statistics of youth social media platform usage. Teenage Facebook users in the US have declined by 13% since 2019 and are projected to drop an additional 45% over the next two years. Adults between 20 and 30 years old were expected to decline by 4% over two years. The researcher also noticed that the younger a Facebook user was, the less they regularly engaged with the app.
“The “aging up issue is real,” the researcher wrote in an internal memo. They predicted that, if “increasingly fewer teens are choosing Facebook as they grow older,” the company would face a more “severe” decline in young users than it already projected.”
Facebook seems to be acknowledging its issues attracting younger users and is trying to stop the bleeding. According to a Facebook internal message, account registrations from March 20-21 for users under 18 were down 26 percent from the prior year. Those teens already on Facebook are engaging less than ever before.
“Most young adults perceive Facebook as a place for people in their 40s and 50s,” according to the presentation. “Young adults perceive content as boring, misleading, and negative. They often have to get past irrelevant content to get to what matters.” It added that they “have a wide range of negative associations with Facebook including privacy concerns, impact to their wellbeing, along with low awareness of relevant services.”
Losing Generation Z and younger is an existential threat to Facebook’s advertising model. Facebook plans to initiate multiple new products both across the namesake platform and Instagram to attract more youth and make the platforms more appealable from a mental health perspective. Time will tell, but the “ageification” of Facebook has had notably deleterious effects on society already, and the Facebook platform may be too late to change in a meaningful way that could attract a younger audience. Focusing on Instagram and a new social media app offering may be wiser for preserving the brand’s long-term viability.
Finally, Meta has been speaking more than ever about the future of its virtual and augmented reality products. With the change in the company name to Meta, it is clear that Zuckerberg sees the virtual metaverse as the next chapter in the social media landscape. There are quite a few projections that consider the current VR market is in its nascent stages and predict a boom in VR and AR market size over the next few years. Meta could be pouncing on the next big thing right before takeoff, with synergy between its own virtual reality headset offering in Oculus.
“Think about how many physical things you have today that could just be holograms in the future. Your TV, your perfect work setup with multiple monitors, your board games and more — instead of physical things assembled in factories, they’ll be holograms designed by creators around the world.
You’ll move across these experiences on different devices — augmented reality glasses to stay present in the physical world, virtual reality to be fully immersed, and phones and computers to jump in from existing platforms. This isn’t about spending more time on screens; it’s about making the time we already spend better.”
Still, a shift in product offering should represent a significant risk for the company. It makes sense to be early to the virtual scene to extend your social media empire, but when has Facebook ever attempted a large new product without it failing? Instagram and WhatsApp were acquired. Slingshot, Lasso, the Facebook Phone, pokes, Places… all dead.
Zuckerberg and Facebook programmers built the premier early social media site, but they have rarely succeeded in new product offerings since then. Now, they have to design a social media website that is fun and offers real-world utility. Virtual concerts, trips, and artwork may be “fun” for some, but it is hard to see the platform driving adoption without the real-world utility. Meta seems to understand that issue and is trying to brand the VR platform as a new way to work and stay connected remotely. Personally, the early demonstration of Meta's work meeting software seemed erroneous and not very conducive to an actual workplace. Early reviews of the meeting software have mainly been negative.
Color me skeptical that a company with the business model and drive to sell advertising and hasn’t made a significant popular addition in many years can get the metaverse off the ground. Meta is all in on virtual reality with $10 billion in spending on the metaverse this year and expects to spend more for the next several years. That is a lot of research and development spending that has to overcome the fact that the VR market is still largely inaccessible, requiring pricey upfront investments, and the adoption rate currently is still relatively low.
The metaverse also seems to ignore the cries of harmful effects of Facebook on youth mental health. I am unsure if Facebook can overcome the adverse health outcomes that seem ingrained in social media. Facebook believes the platform simply mirrors real life and that issues that plague the service are not due to the service. There is some truth in that statement, but they should acknowledge that Facebook metastasizes real-world problems. What can we expect in a virtual metaverse built around social engagement if social media is already unsafe? We already know that research indicates virtual abuse is “far more traumatic than in other digital worlds.” My wife played Rec Room once on PSVR and cried. Virtual reality has a lot of positive test cases, but social media built by an advertising empire may not be the way to get there.
Meta is one of the best-performing stocks on the entire US market with a decent discount rate compared to the other FAANG (now, MAANG) stocks. It appears strong for the short to medium term, but the investments in virtual reality may need to pan out for Meta to stick as one of the premier tech companies in the distant future. It probably is a worrying sign for Meta that its genius Chief Technology Officer of Oculus John Carmack has already voiced concerns of the recent rebrand.
"I really do care about [the metaverse], and I buy into the vision, I have been pretty actively arguing against every single metaverse effort that we have tried to spin up internally in the company from even pre-acquisition times... I have pretty good reasons to believe that setting out to build the metaverse is not actually the best way to wind up with the metaverse. The most obvious path to the metaverse is that you have one single universal app, something like Roblox. I doubt a single application will get to that level of taking over everything. I just don't believe that one player—one company—winds up making all the right decisions for this. Mark Zuckerberg has decided that now is the time to build the metaverse, so enormous wheels are turning and resources are flowing and the effort is definitely going to be made." - John Carmack
