Meta’s Dreams Have Become A Metaverse Nightmare

Meta just announced its financial year and Q4 results, and their investors are very pleased. The stock for the company shot up by 18% after the results were announced, mainly on the back of announcements such as Facebook reaching two billion active users and Instagram’s better AI discovery engine. However, a dark cloud looms on the horizon, and it’s called Reality Labs. Let’s delve deeper into the nitty-gritties of this earnings report.

Profit-Makers

Meta saw an increase in the average users on their platforms, with all parameters such as daily active people, monthly active people and monthly active users seeing an uptick of 4%. This also translated into better ad impressions, which saw an increase of 18% on a YoY basis. However, the price per ad saw. reduction by 16%. Regardless of this, the report heralds good tidings for the company, as it shows that Apple’s strong stance against advertisers like Meta has not affected its bottomline.

In September 2022, Apple introduced a feature called App Tracking Transparency, which allows users to choose whether a given application can track them across different apps and websites. This was a huge blow to Meta, which tracks users’ activity across the web for better targeted advertising.

While the tech giant did see a drop in revenue of 1% compared to the numbers from last year, they predicted that their operating expenses would be lower in the coming years due to the widespread layoffs and cost-cutting measures. Meta’s headcount also increased by 20% YoY, but the company made it clear that the 11,000 employees that were laid off were not included in this count. 

To give you the context, Meta underwent a behemoth restructuring event late last year, of which layoffs were only a small bit. In addition to reshuffling talent between teams, the company also cut down its real estate footprint, both of which resulted in an expense of $4.2 billion in Q4 ’22 alone. The company also focused their efforts on growing areas like their AI discovery engine and the metaverse, but it seems only one of those has paid off. 

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Metaverse, a thorn in its side

With the increased focus on improving user experiences on Instagram and Facebook, it seems that Meta’s metaverse dream has lost momentum. The earnings report shows that the company lost a whopping $4.2 billion in Q4 and $13.7 billion over the course of the year in their Reality Labs segment. This is an ongoing trend ever since the launch of this division, with RL losing the company $10 billion in 2021.

Reality Labs is a wholly owned subsidiary of Meta focused on the creation and sales of their VR headsets, along with ongoing research in VR and AR technologies. Notably, it is also the division spearheading research into the metaverse. 

Meta has been on an acquisition spree to build its metaverse over the course of the financial year, which is only partly responsible for the big bill of Reality Labs. To date, the company sells its entry-level VR headsets with a subsidy, even after the $100 price hike in July of last year. This means that the metaverse is a huge money sink for the company, something that will only prove to be a thorn in its side as money gets tighter. 

More layoffs coming?

However, it seems that the management has other ideas to cut costs. Along with reducing their real estate footprint, they are also looking to cut down on employees’ perks. Zuckerberg has also stated that he wants to get rid of Meta’s ‘management culture’, suggesting that the middle management in the company may be at risk. 

What’s worse, layoffs may be on the horizon as Meta looks to return to its scrappy roots. In a statement, CEO Mark Zuckerberg said, “Our management theme for 2023 is the ‘Year of Efficiency’ and we’re focused on becoming a stronger and more nimble organisation.” He further elaborated in the earnings call, “We closed last year with some difficult layoffs and when we did this, I said clearly that this was the beginning of our focus on efficiency and not the end.”

This can be interpreted to mean that the upper management in Meta is looking to lay off more of its workforce. Reports have also emerged that employees in the company are bracing for more layoffs. According to this report, the company is conducting further performance reviews to increase the count of lowest performing workers to 15% of the workforce. Insiders have also placed the next round of layoffs as looking to cut a further 5-10% of the workforce.

While one can argue if layoffs are indeed good for the industry, at this point, the worry is if Meta’s metaverse dreams will change into a metaverse nightmare. Investors are currently satiated with the growth of Instagram Reels and Facebook, but Zuckerberg’s metaverse aspirations might be the straw that breaks the camel’s back.