I have been a vocal critic of Meta as a Metaverse company. I wrote about it a couple of weeks ago in Meta (Facebook) Problems – Part 1: The Metaverse. Later I also wrote about the challenges Meta is facing from TikTok and other short video format companies like YouTube and Snap in Meta (Facebook) Problems – Part 2: TikTok and YouTube Shorts Growing Engagement.
Since then I am pondering and analyzing whether it would make sense if Meta split into a Metaverse and a Social company. But how did I get here? Let me take two steps back. In past, Meta’s (aka Facebook) problems have been hidden by its financial results. Shareholders in past were ignoring all problems Meta had as it was making a fortune and was creeping towards a trillion-dollar valuation. Now that Meta is financially struggling due to multiple factors the issues that were hidden for so long are surfacing. As a result, market forces have converted Meta’s $1T valuation to $250B.
Irrespective of the market valuation, the financials of the company looks solid and at the same time very focused on the Family of Apps business where most of the income is from Ad revenue. Net Income is growing and the Cost of revenue is very well maintained at 19%. However, the dark spots are the bottom two lines in the chart below. Net Income could have been rising significantly has Meta not been spending too much on Reality Labs. The cost of Reality Labs has more than doubled since 2019 from $5B to $12B. A significant portion of this money is being spent on Metaverse and AR/VR projects.
I do realize that Meta needs to diversify its businesses to generate revenue outside of advertisements. In past, I have said Meta did miss some ample opportunities by not entering into the cloud and OS business. The market is too crowded to enter now hence Metaverse is the bet they are playing on. This is the reason I propose the split between Metaverse and a social company.
More than making shareholders happy, the split between Metaverse and Social will enable Meta to focus on the right problems for each division. I am of the opinion that a huge focus on Metaverse by Zuckerburg is taking its toll on social business. I think it is an apple-to-orange comparison but learn from Bezos. He wanted to build Blue Origin but did not merge his goals of being a space company like Amazon. One can simply argue that Meta (be it metaverse or social) is a tech stack built together. Whereas Amazon and Blue Origin are two different business operations. But it’s the intent of operating them as separate businesses without losing sight of either. Here is the model I propose.
What would separate operations look like?
Meta as a social company?
Goal: Social network and entertainment
Businesses: Facebook, Instagram, Whatsapp, and Meta Pay
Focus: On immediate problems like getting more user engagement (TikTok) and Apple privacy issues
Revenue streams: Advertisement, Shopping (Insta shop), In-app purchases, Whatsapp Business, Meta Pay
Two provoking issues that Facebook should tackle immediately
Meta has been great at copying features in the past, whether it’s swiped stories from snap or reels from TikTok. It has understood the demand and the behavioral patterns and has shifted gears fast. I am not saying copying is bad, I am just saying they have been thoroughly successful until the advent of the TikTok algorithm “Universal Basic Distribution” (regarding which I wrote in detail here).
The biggest issue for Meta with the advent of TikTok is declining user engagement in the age group of under 25. It’s a threat. The next gen of users is the TikTok generation. The delta is almost 12% points and is poised to grow even more.
However, as I concluded in my last article:
At this point in time, this is what separates Meta from other reels or short video format platforms. The targeted ads based on the social graphs are more engaging and have a higher conversion rate. TikTok or YouTube is best for promoting the brand. Remember your Cable TV, there is an ad that is viewed by everyone who is watching that TV channel. It’s not targeted to anyone specific.
2. Apple Privacy Challenges
Apple knows how to assert its dominant position and it showed that couple of years ago when it became the first smartphone OS maker to put a wall over sharing user data with 3rd parties. Facebook has apparently lost close to $12B in advertising revenue due to this. Facebook’s ad targeting is less accurate as it knows less about its users.
Facebook needs a focused response quickly. The only response Meta has is to build a better AI model that generates user behavioral predictions based on millions of data points they have already collected. As a result, Facebook should continue to invest in an “aggregated event measurement” workaround.
Meta as a Metaverse company
Meta is continuing to pour money into building the Metaverse vision. It’s costing them around $10B a year with no almost no income and an empty horizon world. Renaming the company to Meta in my opinion shifted Zuckerburgs focus to being a metaverse company. I believe this is the right time, a decision is made to separate the metaverse division.
Goal: Build a Metaverse Platform
Businesses: Hardware (Quest + Portal), Metaverse platform
Focus: Increase engagement in horizon world, and acquisitions (Roblox or Unity)
- Individual: Advertisement, In-app purchases, Hardware sales.
- Businesses: Offer metaverse platform as a service
I have written before that Meta should not build metaverse alone. They should be acquiring companies that have alternate worlds with users and companies to invest money. Roblox and Unity are prime examples. I have written in past about Meta + Unity and this is what I concluded:
Facebook did not only wants to win the AR/VR business but also to dominate it. Domination in that business required a platform that could create content specifically for AR/VR users in 3D and Unity fits that portfolio perfectly.
Unity not only provides this platform, but its biggest asset is the number of developers on its platform and integration with all of the other components a developer needs to build a business. Unity aligns with Meta’s vision of a creator economy which is critical in bringing people together. Unity has an Operate platform that makes money by promoting ads, bringing ad publishers to their platform, and allowing gamers to scale on any platform.
The Metaverse company should be funded by outside sources (debt or personal funds from Zuckerburg). If Elon can accumulate $44B to buy Twitter, I am pretty sure Zuckerburg has the capability to gather VC funds to build the Metaverse company.
To conclude, I think it’s Zuckerburg’s personal ambition to build the Metaverse. The right and safe way to do it is with VC and personal funds. Facebook (social) should continue to be the growth engine and build competing strategies against the likes of TikTok and YouTube Shorts, upcoming twitter plans, and of course myspace (it still exists 😀)