Critics Raise Questions on Meta's Crisis

Meta Platforms (Nasdaq: META) has reached a moment of crisis in its peregrination toward the metaverse. A series of events has revealed -- again -- what could turn out to be either a major investment in a lucrative future or Zuckerberg’s Folly.

First, virtual reality pioneer John Carmack quit his post as executive consultant for VR (virtual reality) at Meta Platforms last week, complaining not about the technology but the company’s operational efficiency.

“We have a ridiculous amount of people and resources, but we constantly self-sabotage and squander effort,” wrote Carmack in an internal Meta memo that he eventually posted on Facebook. “There is no way to sugar coat this; I think our organization is operating at half the effectiveness that would make me happy.”

According to Carmack, he had the ears of the highest-ranking decision makers at Meta, but they never put his suggestions into action until other, less effective, methods were tried. He wrote:

“It has been a struggle for me. I have a voice at the highest levels here, so it feels like I should be able to move things, but I’m evidently not persuasive enough. A good fraction of the things I complain about eventually turn my way after a year or two passes and evidence piles up, but I have never been able to kill stupid things before they cause damage, or set a direction and have a team actually stick to it. I think my influence at the margins has been positive, but it has never been a prime mover.”

Bosworth Weighs In

Shortly after Carmack’s resignation, Andrew Bosworth, CTO and head of Reality Labs (Meta’s VR division), released an extensive blog titled “Why we still believe in the future,” defending the company’s heavy investment in VR. He wrote:

“During boom times, it’s easy to make big, ambitious investments in what’s coming next. But when economic conditions turn, it’s just as easy to turn the other way: cut back on your ambitions, stick to what’s safest and most profitable today, and squeeze as much as you can from it.

“We’ve all seen the disastrous consequences of this kind of short-term thinking….”

Bosworth believes that technologies introduced in Meta’s recently released Meta Quest Pro headset will evolve into “increasingly compelling alternatives to laptops and desktop computers, placing virtual screens and interfaces on your desk or in your hands.” Apparently, Meta believes its wares will compete strongly against those of Apple (Nasdaq: AAPL).

Doing the Math

Bosworth also stated in his blog:

“As also reflected in our Q3 results, about 80% of Meta’s overall investments support the core business, with the other 20% going toward Reality Labs. It’s a level of investment we believe makes sense for a company committed to staying at the leading edge of one of the most competitive and innovative industries on earth.”

In its third-quarter 2022 earnings conference call, Meta projected that total expenses for 2022 will fall between $85 billion and $87 billion. If 20% of that is accountable as Reality Labs costs, it’s possible that Meta could have sunk over $17 billion this past year in Reality Labs.

The spending will only continue: “We expect Reality Labs expenses will increase meaningfully again in 2023,” said Meta CEO Mark Zuckerberg on the third-quarter conference call.

The losses will mount as well. “We do anticipate that Reality Labs operating losses in 2023 will grow significantly year-over-year,” said Dave Wehner, Meta CFO, on the same call.

Last quarter, Reality Labs operating losses were $3.7 billion. By comparison, Meta’s Family of Apps (Facebook, Messenger, Instagram, WhatsApp, etc.) posted operating income of $9.3 billion. Reality Labs’ Q3 revenue came in at $285 million, down 49%. Meta blames reduced sales of its Quest Pro headset progenitor, the Quest 2.

Investors have decimated Meta's stock this year, in part no doubt to the company's stated direction toward metaverse spending.

Meta’s Expensive Bet

All of which prompts questions about the wisdom of Meta’s lavish expenditure on Reality Labs – which John Carmack thinks isn’t being efficiently run. Is the solution for Meta to spend less on its VR endeavor? Does it need to get its management act together to make the current spending worth it? Can Meta get out of its own way?

Apparently, Mark Zuckerberg has a vision of what he’s after, and he’s unwilling to slow his pace in the race to get it. Over the next few quarters, we’ll see whether his bet’s been too big.