In-depth: Meta layoffs - Are things getting worse for Zuckerberg’s metaverse dream?

While Meta’s massive laying off more than 11,000 of its employees has shocked the big-tech world, coming after the large-scale layoff at Twitter, it has brought the focus on the company’s ambitious project: metaverse.

Mark Zuckerberg had expected the pandemic-induced online commerce to sustain for a longer period. But his expectations were misplaced. He had admitted that his revenue growth calculations were wrong.

“At the start of Covid, the world rapidly moved online and the surge of e-commerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected. Not only has online commerce returned to prior trends, but the macroeconomic downturn, increased competition, and ads signal loss have caused our revenue to be much lower than I’d expected. I got this wrong, and I take responsibility for that,” he wrote to his employees.

The metaverse dream

In October last year, Facebook changed its name to Meta Platforms. And a lot has since been talked about the company’s metaverse vision.

“Metaverse isn't a thing a company builds. It's the next chapter of the internet overall. Our goal is to help build the fundamental tech to bring the metaverse to life,” Zuckerberg said in March this year, appearing virtually in an event.

He stressed Meta’s shifting focus from its social media products to the metaverse. According to him, the future of the metaverse “will belong to the companies that care the most”.

In the recent massive pruning, employees from different business units were shown the door, including “across both Family of Apps and Reality Labs”.

Reality Labs is at the core of Meta’s grandiose vision for the metaverse project. Since January 2019 until September 2022, Meta invested $36 billion in Reality Labs. And this year alone, Reality Labs spent more than $9.4 billion on R&D.

So, what does reducing headcount at Reality Labs mean for his much-touted vision for metaverse? Is Meta’s decision to reduce head count from Reality Labs a sign of how difficult the road ahead for the CEO’s metaverse vision is?

Meta, like other tech-majors, are facing headwinds in a post-pandemic world, observes Lloyd Mathias, Business Strategist and Investor.

“When COVID struck in early 2020, the world rapidly moved online and the surge led to outsized revenue growth for all online companies. While there was an expectation this would be a permanent acceleration and would continue even after the pandemic abated, that doesn’t seem to hold true now. Time being spent online has reduced as people are getting back to physical spaces with a vengeance. Netflix lost over a million customers in the first half of 2022 and its stock price dropped 60%,” says Mathias.

According to him, in Meta’s case a combination of soaring inflation, interest rate hikes, and other economic woes have affected digital advertising spends that the company depends on. “With revenue dropping for the first time ever and competitors like Tik-Tok growing rapidly in the US market, clearly the road ahead is steep for Meta. Timely action was needed to assuage the market and this is what seems to have led to the downsizing of people and projects,” he adds. 

It is too early for metaverse to become a workable reality, at least in the way Zuckerberg envisions, say experts.

It’s like gambling, says Paolo Pescatore, tech, media & telco analyst, PP Foresight. According to him, the journey ahead for Meta is not easy. The metaverse is a huge bet which clearly requires a significant investment, feels Pescatore. Success, he says, is not guaranteed.

“It feels like a one big gamble given the economic crisis. People are not rushing out of their seats to buy a VR headset or even watch 360-degree videos. There are numerous challenges and even the name (metaverse) is confusing to the average person on the high street. While price will always be a factor, creating demand is far more complex than lowering prices. The new device still feels like an expensive toy. Meta is in it for the long haul. The journey ahead is going to be long and painful,” observes Pescatore.

According to him, it is a one big gamble that will take many years to come to fruition. “Payback is not guaranteed in the short, not media term. Zuckerberg should be applauded for acknowledging the failure and making moves to address this. The cost-cutting measures will be welcomed by key stakeholders. Unfortunately, further action will need to be taken. The VR/AR market remains nascent. It still feels like a solution looking for a problem. While there seems to be numerous use cases, adoption and awareness remains lacklustre,” he observes.

TRA Research CEO N Chandra Mouli also feels that Zuckerberg’s big bet on metaverse may be a bet too early. Metaverse as a concept is still in its inception, and as with anything at its inception, it will have some early adopters, but the rest will tag along the Metaverse bandwagon with inertia, he feels.

“Zuckerberg’s big bet on metaverse using AR/VR may be a bet too early, especially for a publicly traded company where analysts are closely watching revenues Quarter on Quarter. This is a time when investor patience is running low, and Meta’s share prices fell by almost 30% after the recent results announcement is just one sign of how tough the road ahead for Zuckerberg will be,” says Chandra Mouli.

According to him, the tech industry hires and employee benefits have often boggled industry watchers. At the same time, ad revenues of Meta, Google, and YouTube have all shown falls as VC money is slowing down with ad spends getting rationalised. New project investments in unchartered areas like metaverse should be careful investment, rather than all-in poker bets.

A difficult dream?

“The pressures Meta’s business is facing in 2022 are acute, significant, and not metaverse-related. And there is a risk that almost everything Mark has outlined about the metaverse is right, except the timing is farther out than he imagined,” investor Matthew Ball told The New York Times.

Well, it’s about the timing. Zuckerberg seemed to be in a hurry, which has made him invest so much in the metaverse project. Meta’s much-touted virtual-reality game, Horizon Worlds, proved to be a fluff. Following user complaints, the company put in place a quality lockdown.

The thing is that even some Meta employees are not confident about the metaverse project. A secret survey among one-thousand Meta employees found that only 58 per cent understood Meta’s metaverse strategy. And, when employees were asked to meet virtually inside Meta’s Horizon Workrooms app, many did not even have VR headsets; they ran helter-skelter to get themselves equipped with the devices. There is discontent even among Meta employees about Zuckerberg’s strategy (or rather the lack of it). Even the team members working on the Horizon metaverse app don’t use it, revealed The Verge, quoting an internal memo.

It’s definitely a difficult road ahead for Meta to achieve its metaverse dream, feels Kruthika Ravindran, Associate Director - New Business, TheSmallBigIdea.

On the one hand, she says, the company is focusing on building awesome things quickly, while on the other hand, they are looking at building something with long term impact. For both to go hand in hand, it’s definitely a difficult road ahead. A ‘profitable metaverse’ is still far in the future!

Shradha Agarwal, Co-founder-CEO, Grapes, feels that the concept of metaverse will take time to materialise. According to her, it is not just Meta that is facing revenue loss; all the major tech giants are experiencing difficulty in generating profits given to the volatile market dynamics. “But the major drawback for the Meta is its futuristic vision of congregating people through the virtual world. The concept of interacting, socializing, working, playing, etc. through VR and AR devices will take time to materialize (probably a decade or more) and the investors at present are unable to align with this vision,” Agarwal says.

She feels that metaverse is the future of the digital universe. According to her, the decision to invest heavily on Reality Labs looking at the promising market trend during COVID was a hasty decision, which needs some concrete alteration.

“The company must continue its metaverse endeavour but can’t ignore the foundations/ pillars that have made so famous. Taking the pace slow and generating revenue from other services with the ability to drive the business at present will be a more practical approach to perform fairly well in the plunging market at present,” she maintains.

Will metaverse save Meta?

Last year, Meta reported a $10 billion loss in the AR and VR division. Oculus’ Chief Technology Officer, John Carmack, has blamed big-company bureaucracy and concerns about diversity and privacy for the slow development of metaverse.

As of April 2022, there were more than 10,000 people working on its metaverse projects – more than a tenth of its workforce. Are Meta layoffs a sign that the metaverse might not save the company? The fact is that it’s been coming for several months. Annoyed at slowing growth, Zuckerberg, in a June 30 call, warned that “realistically, there are probably a bunch of people at the company who shouldn’t be here”.

According to Shradha Agarwal, investing fully on metaverse will not save Meta at this point of time. “The futuristic concept of metaverse is weighing down its performance. But there are other factors also which are contributing to the bearish performance of the company. The anti-tracking privacy change by Apple is acting as a resistance for the social media platform to target ads. The new policy is discouraging the small businesses acquire new customers from Facebook adverts. Completely focusing on just metaverse will not help the company at present. There is a need to restructure the strategy and prioritize things with kaleidoscopic view,” she says.

Kruthika Ravindran thinks that the transition from Facebook to Meta clearly put forth the company’s metaverse ambitions. “Despite the layoffs and losses, metaverse is the very future of Meta and will continue to be a priority for the company. What will save the company now is how they restructure their resources and reach a break-even point,” she affirms.

Mathias doesn’t hold the view that this pullback will significantly weaken Meta’s well-entrenched status as a leader in the emerging space. Also, he adds, the company has three dominant platforms – Facebook, Instagram and WhatsApp, all leaders in their respective areas – that will ensure its continued dominance of the web.

According to him, metaverse is a bet that the company has taken as the next big leap for the digital world.

“As a dominant leader in the web space, its only other direct digital competitor in the digital advertising space is Alphabet, owner of Google and YouTube; it was Zuckerberg’s way of staying ahead, and indeed being the clear leader in what he believes could be the next big thing,” he maintains.

Is Zuckerberg’s metaverse focus so costly and misguided that it derails the company entirely?

Mark Zuckerberg’s metaverse focus may be a bit of a hit for now, but is not so big that it can derail the whole company, says Mathias, emphasising that, “Meta is not a one-trick pony with its three big platforms (Facebook, Instagram and WhatsApp) that are capable of pulling huge revenues and monetizing opportunities for a long time to come. In the short term there may be some impact, but this scaling down may help mitigate that.”

Meanwhile, Kruthika Ravindran admits that it’s an expensive vision for Meta. “The concept of metaverse is literally changing with every innovation, innovations that no one would have anticipated even a few months ago. For something like metaverse, the future of which has no clear picture yet; there are going to be more derailments for the company,” she predicts.

It’s like a “Karma comeback” for Meta, says Chandra Mouli. “As a whistleblower said to the US Congress in 2021, Zuckerberg is the main person driving the company’s decisions. Facebook has been earlier accused of prioritising profits over toxic content or personal privacy, which Zuckerberg ineffectively countered. So, when analysts and investors focus on Meta’s current profits over future bets it’s like a Karma comeback. The train track is shaky for sure, but it may take a few more than a few of Zuckerberg’s jerky moves to derail,” he quips.