Wall Street not sold on Mark Zuckerberg's vision of the metaverse
Wall Street isn't exactly hopping aboard Facebook's plan to explore the metaverse. Shares in the social networking company fell to a five-month low on Thursday — the same day CEO Mark Zuckerberg outlined its new direction at the company's annual developer conference.
Although Facebook's strategic shift could eventually pay dividends, it "will take years to come to fruition while coming at a steep price," CFRA analyst Angelo Zino told investors in a report. Investment bank Raymond James also dropped its price target on the company's stock to $410, although it maintained a "buy" rating.
Such caution is warranted. Even true believers in Facebook, which last week officially rechristened itself as Meta to underscore the company's new mission, will likely have to wait years before seeing any return on what is sure to require a massive investment as the company pivots toward what it bills as the internet's next stage.
Bank of America analysts estimate that Facebook could have to sink as much as $50 billion into virtual reality, augmented reality and other building blocks for the emerging metaverse before it even breaks even. The scale of Facebook's metaverse push poses a "risk of capital destruction," they wrote, warning of the "potential loss of focus on core business" such as Instagram and Facebook as well as competition from Apple or other hardware companies.
Translation: Building out the metaverse will be arduous and expensive, while the financial payoff is uncertain.
"Own the digital world"
More certain, by contrast, is that Facebook — a company that in its early days famously trumpeted a willingness to "move fast and break things" — is now at a stage where big bets and speed of execution are essential. The personal network it's created encompasses half the world's population, and given the scrutiny it faces from governments, growing more by buying competitors seems unlikely.
To be sure, if anyone can foot the gargantuan bill of creating a new digital world, it's Facebook. The company is on track to generate more than $100 billion this year from ad revenue — a figure larger than the GDP of Luxembourg or Costa Rica.
"They have a cash-cow business in the form of their current social media apps," Mandeep Singh, an analyst with Bloomberg Intelligence, told CBS MoneyWatch. "They can afford to make these kinds of big bets."
If Zuckerberg's vision proves correct, the financial returns could be enormous. In its version of the metaverse, Facebook would own far more than a merged service or product, but rather it would control the very infrastructure where people lead their digital lives, said James Muldoon, a senior lecturer at the U.K.'s University of Exeter who studies technology and politics.
"Meta wants to own the digital infrastructure of 21st century life. They want to be the first mover in a new world of product, so that their hardware and software becomes the default," Muldoon told CBS MoneyWatch.
"The new move for Meta will be creating large digital worlds, with ecosystems, and they basically want to get in at the base," he added. "They can charge content fees, subscription fees, licensing fees, transaction fees — they want to own the digital world in which content creators, users, operate."
What is the metaverse?
The term, first popularized in the 1992 sci-fi novel "Snow Crash," refers to a virtual world that coexists and overlaps with the physical one, with people interacting as avatars.
"The metaverse becomes the gateway to most digital experiences, a key component of all physical ones, and the next great labor platform," venture capitalist Matthew Ball wrote in a treatise.
That world doesn't exist today on anywhere near the scale Zuckerberg envisions, but a small version can be found in gaming. Platforms like Roblox and Minecraft allow gamers to collaborate to create different experiences, from battling to socializing; gamers make money by streaming and even hold protests in games in response to real-world events. Wearable computers, from the Apple Watch to Snap's augmented-reality spectacles to Google's failed Glass project, could make up another part of the metaverse. Nvidia's Omniverse, which connects 3D environments into a shared virtual space, is another.
Wall Street sees myriad ways to make money in this world, from virtual sports and concerts to fitness classes and souped up shopping.
There are "multi-billion revenue opportunities," Bank of America analysts wrote. "For example, 50-yard line seats for the Superbowl, taking a hitting class with [Major League baseball player] Buster Posey or shopping for sunglasses with virtual try-on may all be possible in the metaverse," they said.
Horizon Workrooms, a work-focused virtual space Facebook launched in August, could offer an upgrade on Zoom, allowing less awkward collaboration and even board meetings, said Singh of Bloomberg Intelligence.
"You can sit with your colleagues, and even though it's virtual the experience will be a lot more intimate," he said.
All these virtual experiences will be paid for with actual money, Zuckerberg outlined.
"If you're in the metaverse every day, you'll need digital clothes, digital tools, digital experiences," he said in an October 25 earnings call, with this digital economy worth "hundreds of billions of dollars" by the end of the decade.
Not surprisingly, there will likely be plenty of ads in the metaverse. Zuckerberg has made clear he wants to carry Facebook's business model, which is based on using personal data to sell targeted advertising, into this new domain.
"Ads are going to continue being an important part of the strategy across the social media parts of what we do, and it will probably be a meaningful part of the metaverse, too," he said in the call.
A "new drudgery"?
To draw people in, of course, Facebook will need a critical mass of users. Singh calculated that 12 million to 15 million people would need to join the metaverse before the company starts reaping the benefits — a milestone he thinks will take at least three years.
Virtual reality technology also remains clunky, hindering more widespread adoption, said Muldoon of the University of Exeter. "People may not want to spend that much time in the metaverse," he said.
But even if individuals aren't yearning to enter such virtual worlds, it's possible that other companies — employers or schools, for instance — could impel them.
"Corporations do have a way of forcing people to use new technology, even though it starts off being unpopular at first, primarily through workplaces and other institutions," Muldoon said.
This could happen if large companies migrate to Facebook's Horizon Workrooms, for instance. "Meetings will be held in the workplace, primarily through virtual headsets — they will be forced to attend online events, and it will be something many workers will experience as ... a new drudgery for their work," he said.
Facebook's bid to create a new virtual world — just as it faces mounting legal and regulatory scrutiny in the current one — has irked privacy advocates and tech critics. "[T]his is a PR ploy to distract from Facebook's myriad scandals," Matt Stoller, research director of the American Economic Liberties Project, an anti-monopoly group, wrote in his newsletter.
Muldoon noted that the move could backfire by making regulators more likely to crack down on the company.
"This might be a bridge too far, particularly for the EU, which is looking at digital markets. This may push them to take stronger action than they otherwise might have," he said.
