Meta (NASDAQ: META) strategic pivot comes as no surprise to anyone at this point. Besides the name change, part of Meta’s strategy is to present financial data in two distinct segments: 1) Family of apps which includes Facebook, WhatsApp, Instagram and Messenger; 2) Reality Labs – which provides virtual reality products like Horizon Worlds, Quest, Portal and Spark.
Without the conscientious effort to prioritize the metaverse through its rebranding, this article would likely have a different tone. As shown in the consolidated financial statements below from Meta’s 2021 Annual Report, revenue growth for the Application Family segment reached an impressive 36%. Reality Labs, meanwhile, suffers a loss of $4.48 for every dollar of revenue it generates based on its operating margin. Reality Labs is currently on track for even bigger losses in 2022.
Meta management and bullish analysts would likely argue that this is a classic J-curve. The first part of the J-curve is the part of the capital-intensive negative return on investment as the technology is developed. Once completed, the adoption and scale of this technology will put the business on the path to higher revenues and much higher margins due to the minimal capital expenditure required for software. However, there are reasons to believe that the adoption will be disappointing.
What is the metaverse anyway?
Author and venture capitalist Matthew Ball defines the metaverse as “a large-scale, interoperable network of real-time rendered 3D virtual worlds that can be synchronously and persistently experienced by an effectively unlimited number of users with a sense of individual presence”. While this is the most robust definition available, it fails to account for the convergence of multiple technologies needed to make it happen, such as computing scale, augmented reality, and virtual reality.
Large-scale immersive worlds
According to Intel Senior Vice President Raja Koduri, a digital world massive enough to house billions of real-time users would require “a 1,000x increase in computing efficiency over the current state of the art.” “. John Carmack, founder of Oculus, says we’re “five to ten years away.” Simply put, what many imagine as the metaverse of sci-fi novels like Ready Player One and Snow Crash isn’t technically feasible today. There’s a reason Massive Multiplayer Online games limit the number of people playing on the same server at any one time. Otherwise there would be sacrifices in graphics and latency that would hamper the experience.
Despite this, there are several steps on the road to real-time rendered virtual worlds at scale. Unfortunately, many of them face hurdles in consumer adoption.
Consumer adoption V/R and A/R
The app family can easily find a consumer base due to mobile penetration rates of around 80% in the developed world and 50% in the developing world. People are literally on their smartphones all the time. The same cannot be said for virtual reality headsets. To be fair, V/R and A/R can still be experienced in a non-immersive way – imagine game worlds, real estate solutions and Snapchat filters. These integrate with already existing computers and smartphones.
Despite this, usage is still low. VR penetration rates (headset and non-headset) are only 16% in the US and mostly for gaming. While I believe the future of online interactions will become more immersive over time, it requires a different user experience than simply downloading an app to your smartphone that you use every day. This requires a paradigm shift in the way we currently interact online, which constitutes web-based and smartphone-based applications. Some envisage this paradigm shift in a few years. I believe it is in a generation. Reality Labs may be a black hole for longer than some realize.
Is the Achilles heel of the Meta blockchain
There is another important point. Even if all of the above assumptions are true and we’ll all be in the Metaverse five years from now, why is Horizon Worlds and Meta’s suite of products rather than Decentraland or The Sandbox or a family of apps focused on integrating data? avatar as Ready Player Me?
In the example counters above, users can own their clothing, game items, land, real estate, and more as non-fungible tokens. A digital world where objects belong to users is more like the physical world. The alternative is a digital world owned by Meta. This is the public versus private metaverse debate that is currently raging. In my opinion, this is akin to the internet versus intranet debates of the mid-1990s. I believe that the metaverse – whenever it comes to fruition, will be open and owned via blockchain.
The numbers indicate that Meta’s Reality Labs is a black hole. Money comes in, paltry revenue figures come out. However, is this a J-curve dynamic where a huge payout will occur in a few years?
The stock has been pretty punished, down 63% year-to-date, even after a 32% rise in price over the past thirty days. It can still be an adequate entry point even with the Reality Labs anchor weighing it down. However, if you believe in a future where online interactions are immersive and Meta has the network effects to capitalize and grow Reality Labs in addition to its Family of Apps business, this is a great entry point.
I am less optimistic. In terms of technical requirements and consumer adoption, we’re further from the metaverse experience than you might think. Even so, there is no guarantee that users will choose to have this world rendered by Meta over the open one.
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