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Will Metaverse be profitable?

IFM_ Metaverse
Meta is competing with Microsoft and other companies to be the first Metaverse platform in the world

With roughly 3 billion subscribers on Facebook, 2 billion on WhatsApp, and 1.5 billion on Instagram, 38-year-old Mark Zuckerberg is the undisputed leader of the world’s greatest social media empire. His business also received a significant redesign in October 2021, as it rebranded itself to Meta. The company with a market worth nearly USD 500 billion have been aggressively backing the “metaverse” in the last two years, a concept that pitches for an immersive online experience that would allow users to work, play, and socialize in virtual reality (VR) instead of navigating between different websites as mediated by computers/smartphones.

Reality Labs, the company’s metaverse branch created when it bought Oculus in 2014 was expected to cost USD 10 billion in just one year.

All eyes will be on Facebook CEO Mark Zuckerberg in 2023, as the company returns to defensive mode after a large wave of layoffs. The company is trying to copy Facebook’s success on Web 2 by making an early version of the ‘Metaverse’.

Numerous technological and cultural issues continue to impede Meta’s progress in the Metaverse, which is why the tech giant reported quarterly losses.

The race towards the future

Microsoft surprised the world by announcing its plan to acquire Activision Blizzard for USD 68.7 billion. If the United States’ Federal Trade Commission (FTC) doesn’t step in, the acquisition will elevate Microsoft to the position of third-largest gaming company (behind Tencent and Sony), adding blockbuster games like Call of Duty, World of Warcraft, and Overwatch to its catalogue and giving it access to more than 30 studios (as opposed to Sony’s 17).

But, this purchase is more of an investment in the Metaverse than gaming. Gamers are fundamental, and the Metaverse is built on the foundation of their virtual reality.

Meta is competing with Microsoft and other companies to be the first Metaverse platform in the world.

The Metaverse today

The Metaverse, which will be developed as an abstraction layer over the actual world and interact with how we now live, will blend Virtual Reality (VR) and Augmented Reality (AR).

Metaverse will be a new paradigm where our digital and online lives will intersect. However, it is still being determined how exactly the process will take place.

One of the better descriptions of the structural elements and levels of the Metaverse has been presented by entrepreneur and game designer Jon Radoff. The seven levels create an end-to-end value chain for the Metaverse. He names experience, discovery, creator economy, spatial computing, decentralization, human interface, and infrastructure. Experience dematerializes our physical environment to release a graphical background and social immersion, where content is generated dynamically via interactions and feeds rather than only by individuals. The process of discovery helps people to locate information sources about novel events. Simple instances of this are NFTs.

The tools that creators will utilize to produce more live, social, and dynamic experiences are all part of the creative economy. To push the limits of conventional interactions, spatial computing creates 3D environments, incorporates data flows from gadgets, and recognizes voice and gesture control. Blockchain technology, for example, is used by decentralization to facilitate value transfer across entities. The human interface combines the human body with the computer to provide a seamless interface for traversing the Metaverse. Infrastructure is the primary technological layer that the Cloud, 5G, AI, next-generation mobile, and wearables rely on.

Most of the parts of this layered architecture are already in existence, even though some are still in their infancy. As a result, parts of the Metaverse may pass earlier than anticipated.

An endless pit

Reality Laboratories, the branch of Meta attempting to realize the Metaverse, is proving to be a more significant money pit than anticipated.

Reality Labs reported an operating loss of USD 4.28 billion for the 2022 fourth quarter, higher than the USD 3.3 billion in the third quarter.

According to CNBC, the figure is marginally less than experts’ forecasts for a loss of about USD 4.36 billion for the quarter. This number and Meta’s solid user base and deliberate cost-cutting measures helped the stock increase by about 19%.

Reality Labs has pulled in over USD 13.7 billion over the last 12 months. Its fourth-quarter sales of USD 727 million exceeded analyst projections of USD 715.1 million.

Investors have been criticizing Meta’s choice to keep pumping money into the Metaverse. One of them even urged for a cut back in these expenditures in an open letter titled “Time to Get Healthy”.

However, the business has defended its pursuit of a vast new virtual world.

After the announcement of its earnings results in March 2023, Zuckerberg participated in a Q&A session, where it was said the company, “There are no indications that we should change Reality Labs’ long-term approach. We are always changing the specifics of how we carry this out.”

A listener questioned if “accelerating losses” at Reality Labs should be anticipated in 2023 and whether such losses should be expected to “peak” this year.

“We still expect our full-year Reality Labs losses to climb in 2023,” said Susan Li, the chief financial officer of Meta, while adding, “and we will continue to actively spend in this area given the enormous long-term prospects that we see.”

In a blog post he published in December 2022 titled “Why we still believe in the future,” the company’s chief technology officer Andrew Bosworth stated that Meta would keep allocating 20% of its budget to Reality Labs.

Andrew Bosworth allegedly informed Reality Labs’ 18,000 employees in an internal email sent in late December that the business had already “fixed too many problems by boosting manpower.”

In addition, Meta’s stock increased 19% after hours of the data release, indicating that many investors are ignoring losses in a segment that only accounts for slightly more than 2% of the business’s revenue.

Will Metaverse make a profit?

Meta CEO Mark Zuckerberg is sure that the Metaverse is the future.

“The company’s branch for virtual reality, Oculus, is already managed by Facebook. As a result, the capabilities of Oculus VR headsets are currently relatively constrained. But, Facebook wants to advance technology such that headsets no longer resemble bulky helmets and more closely resemble a pair of Warby Parker spectacles. In addition, the gear must give the user a genuine sensation of presence in the virtual world for the Metaverse to function,” Mark Zuckerberg remarked.

Although Facebook will sell the equipment, which differs from where the money is made, on the earnings call, Mark Zuckerberg stated that Facebook’s objective is to offer its headsets for the lowest feasible price and concentrate on generating revenue from trade and advertising within the Metaverse itself.

While advertising will continue to be present, Facebook will prioritize selling virtual items. According to Mark Zuckerberg, Facebook’s approach to revenue earning from the Metaverse would include advertising in the Metaverse, but he sounded more optimistic about digital trade.

Several people view some of today’s video games as early prototypes of what a metaverse may be, including Microsoft’s Minecraft, Roblox, and Fortnite. These free games generate revenue by offering players virtual products. At the results conference, Mark Zuckerberg suggested that Facebook adopt that business model and take a cut of each transaction to generate revenue in its own Metaverse.

According to tech investors, the moment is unsuitable for placing a wager on Meta Platforms finding cost savings as they pertain to significant investment in virtual reality. Instead, much of the market has been focused on the billions that Mark Zuckerberg is investing in Reality Labs and his vision of a future internet and social connections altered by the metaverse idea. As a result, the corporation is slashing expenses, including massive layoffs. At the moment, Reality Labs is losing more than USD 10 billion annually, but a senior Meta VR official told CNBC that the company will keep on investing.

Investors want the tech giant to cut back on spending amid a challenging stock market and a faltering economy. Alphabet is being pressured to reduce expenses. Amazon is laying off employees, many of them from business units whose risky ventures didn’t pay off as well as expected. The value of Meta shares has decreased by 65% in 2023. In an October 2022 letter to its management, Altimeter Capital stated that Mark Zuckerberg’s corporation has “drifted into the region of excess.”

In an interview with CNBC’s Steve Kovach, Ash Jhaveri, vice president of Reality Labs partnerships, described the layoffs as “very terrible”.

“But we are making the appropriate investments in our core business and our future,” he added.

Technocrats and CEOs believe that the technology is robust, and it is only a matter of time before Web 3.0, Virtual Reality, and blockchain technology intersect and create a highly profitable technological revolution.

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