Facebook Becoming Meta is About Apple, Not "a Distraction"
Last week, Facebook announced that it is renaming the company Meta, and the hot takes have been scorching – and many are simply wrong. Everyone from CNN to MarketWatch to Frances Haugen, the Facebook whistleblower herself, have concluded that Facebook’s goal is to distract the press, the public, and government regulators from its various abuses. If that were the case, a simple rename would do, along with a switch in CEO Mark Zuckerberg’s role. Instead, Facebook is investing tens of billions of dollars and 10,000 employees building metaverse-related hardware and software. Zuckerberg isn’t ceding control over Facebook to another executive, he’s just adding more to his workload alongside it.
It’s not surprising that people who are outraged about Facebook’s focus on growth over democracy and public health would see a sci-fi moonshot as a blatant attempt to change the subject and avoid consequences. However, the real reason Zuckerberg is showing off videos of possible metaverse futures is much simpler: it’s a hedge against Apple’s control over the advertising revenue that powers Facebook’s earnings.
(There is also the possibility that Facebook will need a new platform if younger demographics shun Facebook, but that’s what Instagram, WhatsApp, and Reels are for.)
Facebook has been building the groundwork for virtual worlds for years now, but the company’s initial investment in virtual reality (VR) was mostly a defensive hedge: if social networks moved into VR, Facebook wanted to be there first. In 2014, the company spent $2 billion buying Oculus, which sounds like a lot, but not if you have Facebook’s balance sheet. Oculus’ first products were groundbreaking VR headsets that required expensive PCs and a fair amount of technical expertise to set up. However, Facebook continued funding R&D in augmented and virtual reality projects and reached a crucial milestone with the Quest, a sophisticated standalone VR headset with a user experience simple enough for mainstream consumers. When it launched the Oculus Quest 2 last year, Facebook subsidized the hardware so much that even budget Chinese companies cannot compete. Facebook also regularly offers software discounts to consumers after purchase.
The biggest factor that drove Facebook’s increased investment is the expectation of revenue lost due to Apple’s privacy changes in iOS 14. Facebook had been warning for over a year that Apple’s insistence that consumers be able to control how they were tracked online would impact its ability to target consumers with advertising. This past quarter, that threat materialized in full. Facebook missed its revenue forecast, and its CFO is blaming, “the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple’s iOS 14 change.” Knowing that today’s mobile platforms are out of its control, Facebook doubled down on its bet that the next major computing environment will be virtual.
What is a metaverse? It’s functionally just a version of the Internet with 3D environments in lieu of apps and web pages that you interact with using AR or VR interfaces. Facebook believes that by investing in AR and VR as a platform, it will be able to fully track user activity on that platform, and monetize that data with advertising. Owning a platform also enables gatekeeping services like app stores, which is a key part of Apple’s Services profit and the way that Google funds Android. Finally, platform owners have strong integration and marketing advantages for services with recurring revenues that run on the platform, explaining Facebook’s recent purchase of Within, the studio behind Supernatural, the most compelling VR exercise service. (If Facebook hasn’t also tried to buy Beat Games, makers of hit VR game Beat Saber, I would be shocked.) And, of course, Facebook continues to believe that connectivity, meeting, and social media apps will be an important part of its metaverse.
If you truly think Facebook’s behavior building social media apps is problematic, then misreading its metaverse investments as a name change distraction is dangerously shortsighted. Facebook isn’t changing its name, it is investing tens of billions of dollars investing in building new platforms. If you don’t trust Facebook management with its current apps, it would be a good idea to try to ensure that the new platform it is building has significantly better mechanisms for privacy, democracy, and mental health, and better protections against misuse.
To discuss the full implications of this report on your business, product, or investment strategies, contact Techsponential at avi@techsponential.com or +1 (201) 677-8284.