facebook-losses

Facebook Losses: The Mounting Costs of Building The Metaverse

As of September 2022, Facebook, rebranded as Meta, is a profitable company, generating $18.54B in net profits. Yet, if we look at its Reality Labs segment, which is in charge of building the Metaverse, it recorded a net loss of $9.44 billion in the first nine months of 2022.

YearRevenuesNet Losses
2019$0.5B$-4.5B
2020$1.14B$-6.62B
2021$2.27B$-10.2B
2022 (as of September)$1.43B$-9.44B
FourWeekMBA Intelligence – Source Data Financial Statements

For all its life, Facebook has been a printing machine.

Yet, by 2022, as Facebook rebranded into Meta and tried to build a Metaverse relentlessly, it burned billions in the process.

By 2021, Reality Labs, Facebook’s segment tackling the Metaverse, had recorded over $10 billion in losses. And things are getting worse for 2022.

The attempt to build the Metaverse has changed the whole cost structure of Facebook, which moved from being a printing machine to burning billions.

A key note here, in 2021, Facebook (Meta) was still a printing machine, generating over $39 billion in profits.

And also, in the first nine months of 2022, Meta generated over $18 billion in profits, nonetheless the mounting $10 billion losses of Reality Labs.

Thus, Meta still has a lot of firepower to throw at the Metaverse. Yet, if it wants to succeed, it must change its playbook!

facebook-profitability

Just a little back than a year ago, on October 28, 2021, Facebook officially announced its rebranding into Meta! 

As I’ve highlighted time and time again. At the same time, Zuckerberg did have a vision of VR as the upcoming business platform since 2014 (when it bought Oculus).

The rebranding of Facebook into Meta was a survival move 

With Apple tightening its mobile pipeline with its iOS update (after the change, users need to explicitly opt-in to tracking instead of being opted-in by default – and most users don’t opt-in to tracking). 

This created the foundation to kill the whole Facebook advertising machine. Facebook tries to cut costs, pressed by Wall Street, and it does that by sending home 11,000 employees. However…

facebook-employees-number

This, to me, seems a facade, as the company isn’t planning to cut capital expenditures for the Metaverse, quite the opposite!

In the latest financial releases, Meta projected over $39 billion in capital expenditures by 2023, most of which might be attributable to the expenses to build the Metaverse!

facebook-capital-expenditure

What’s the key issue here? 

I understand that building the Metaverse is not simple and requires a massive amount of resources.

However, it seems that Zuckerberg is falling into the “Bill Gates’ Superhighway trap!”

In other words, instead of building the Metaverse with a bottom-up approach by enabling users’ adoption, Meta is implementing the top-down vision that Zuckerberg has about the Metaverse.

This, to me, seems like the colossal mistake Bill Gates made in the 1990s with the Information Superhighway…

What happened there?

Back in the mid-90s, when the commercial Internet was finally taking over, most luminaries, gurus, and tech experts projected it as a sort of Information Superhighway. 

The vision was about an “interactive entertainment center” (think of it as TV online).

While by 1995, Microsoft had tried to rewrite business history, as if Bill Gates and his company had fully grasped the Internet phenomenon. In reality, things looked quite different!

As explained by Jim Clark (co-founder of Netscape) in his book “Netscape Time: The Making of the Billion-Dollar Start-Up That Took on Microsoft,” in 1994, Netscape was launching the browser which would conquer the whole browser market share, thus, becoming, for a short period, the Internet!

In the same year, Microsoft was still trying to figure things out.

Only in late 1995, a few Internet years later (since one year in the real world seemed like seven years in the Internet early stage) did Microsoft understand that the commercial killer application was the Browser (Microsoft bought the code of Mosaic and built a first, scrappy version, of Internet Explorer).

Microsoft, a native player of the PC era, had risen during the 1970s when Intel had created a whole new industry. Thanks to Intel’s family of chips, with the development of the 8080 – led by Federico Faggin – going forward, the computer industry was born.

The turning point for Microsoft came when IBM, in1980, was about to launch its IBM Personal Computer. The IBM Personal Computer, contrary to what IBM had done in its whole history, followed an open architecture.

In 1980, Microsoft partnered up with IBM to bundle Microsoft’s operating system with IBM computers. The deal was straightforward, IBM would pay Microsoft $430,000 for what would be called MS-DOS.

Microsoft, on the other hand, could license that same operating system to other PC makers beyond IBM. The microcomputer space, which in the late 1970s was dominated by Tandy, Commodore, and Apple, was taken by surprise as the IBM Personal Computer became a huge success.

Yet, by the early 1990s, IBM had lost its leadership and didn’t manage to capture the value of the PC market. Microsoft, instead, built a software platform that would give it a competitive distribution for decades! 

And yet, when the Internet came about, Microsoft managed to keep up, thanks to its massive investments and distribution strength

Read Also: Facebook Business Model

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Mark Zuckerberg Empire

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Mark Zuckerberg is the principal shareholder of the company. Not only he retains ownership and control of the company. Facebook, like Google, has issued two kinds of common stocks, Class A and Class B. Where the holders of Class B common stocks are entitled to ten votes per share, and holders of our Class A common stocks are entitled to one vote per share. Mark Zuckerberg has a total voting power of 57.9%. 

Attention-Merchants Business Model

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In an asymmetric business model, the organization doesn’t monetize the user directly. Still, it leverages the data users provide and technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data and its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Asymmetric Business Model

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly. Still, it leverages the data users provide and technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data and its algorithms sold to advertisers for visibility.

Facebook Business Model

facebook-business-model
Facebook, the main product of Meta, is an attention merchant. As such, its algorithms condense the attention of over 2.91 billion monthly active users as of June 2021. Meta generated $117.9 billion in revenues, in 2021, of which $114.9 billion was from advertising (97.4% of the total revenues) and over $2.2 billion from Reality Labs (the augmented and virtual reality products arm). 

Facebook ARPU

facebook-arpu
The ARPU, or average revenue per user, is a key metric to track the success of Facebook – now Meta – family of products. For instance, by the end of 2021, Meta’s ARPU worldwide was $11.57. While in US & Canada, it was $60.57, in Europe, it was $19.68, in Asia $4.89, and in the rest of the world, it was $3.43.

Facebook Organizational Structure

facebook-organizational-structure
Facebook is characterized by a multi-faceted matrix organizational structure. The company utilizes a flat organizational structure in combination with corporate function-based teams and product-based or geographic divisions. The flat organizational structure is organized around the leadership of Mark Zuckerberg and the key executives around him. On the other hand, the function-based teams are based on the main corporate functions (like HR, product management, investor relations, and so on).

Metaverse Supply Chain

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Google Business Model

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A hidden revenue business model is a pattern for revenue generation that keeps users out of the equation, so they don’t pay for the service or product offered. For instance, Google’s users don’t pay for the search engine. Instead, the revenue streams come from advertising money spent by businesses bidding on keywords.

TikTok Business Model

tiktok-business-model
TikTok is a Chinese creative social media platform driven by short-form video content enabling users to interact and generate content at scale. TikTok primarily makes money through advertising, and it generated $4.6 billion in advertising revenues in 2021, thus making it among the most popular attention-based business models or attention merchants.

Instagram Business Model

instagram-business-model
Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc.’s overall business model. Acquired by Facebook for a billion dollars in 2012, today Instagram is integrated into the overall Facebook business strategy. In 2018, Instagram founders, Kevin Systrom and Mike Krieger left the company, as Facebook pushed toward tighter integration of the two platforms.

YouTube Business Model

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YouTube was acquired for almost $1.7 billion in 2006 by Google. It makes money through advertising and subscription revenues. YouTube advertising network is part of Google Ads, and it generated more than $28B in revenue by 2021. YouTube also makes money with its paid memberships and premium content.

Twitter Business Model

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Twitter makes money in two ways: advertising and data licensing. In 2021, Twitter generated $4.5 billion from advertising and $570 million from data licensing. While Twitter generated $5 billion in total revenues, it lost 221 million.
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