Facebook's metaverse pivot is a Hail Mary pass

Johannes Ernst


Update Feb 04, 2022: It looks like I was entirely correct with this November post. Facebook is out of new users, over 10 billion in metaverse investments have nothing to show for it yet, and the markets have caught up, dropping the stock by $200 billion in a day. To make things worse, Zuckerberg supposedly said “focus on video” in the all-hands on the same day. He chickened out; he should have doubled down on the metaverse story if he truly believes it. But he did not.

The more I think about Facebook’s Meta’s pivot to the metaverse, the less it appears like they do this voluntarily. I think they have no other choice: their existing business is running out of steam. Consider:

  • At about 3.5 billion month active users of at least one of their products (Facebook, Instagram, Whatsapp etc), they are running out of more humans to sign up.

  • People say they use Facebook to stay in touch with family and friends. But there is now one ad in my feed for each three or four posts that I actually want to see. Add more ads than this, and users will turn their backs: Facebook doesn’t help them with what they want help with any more, it’s all ads.

  • While their ARPU is much higher in the US than in Europe, where in turn it is much higher than the rest of the world – hinting that international growth should be possible – their distribution of ARPU is not all that different from the whole ad market’s distribution of ad revenues in different regions. Convincing, say, Africa to spend much more on ads does not sound like a growth story.

  • And between the regulators in the EU and elsewhere, moves to effectively ban further Instagram-like acquisitions, lawsuits left and right, and Apple’s privacy moves, their room to manoever is getting tighter, not wider.

Their current price/sales ratio of just under 10 is hard to be justified for long under these constraints. They must also be telling themselves that relying on an entirely ad-based business model is not good long-term strategy any more, given the backlash against surveillance capitalism.

So what do you do?

I think you change the fundamentals of your business at the same time you change the conversation, leveraging the technology you own. And you end up with:

  • Oculus as the replacement for the mobile phone;

  • Headset and app store sales, for Oculus, as an entirely new business model that’s been proven (by the iPhone) to be highly profitable and is less under attack by regulators and the public; it also supports potentially much higher ARPU than just ads;

  • Renaming the company to something completely harmless and bland sounding; that will also let you drop the Facebook brand should it become too toxic down the road.

The risks are immense, starting with: how many hours a day do you hold your mobile phone in your hand, in comparison to how many hours a day you are willing to wear a bucket on your head, ahem, a headset? Even fundamental interaction questions, architecture questions and use case questions for the metaverse are still completely up in the air.

Credit to Mark Zuckerberg for pulling off a move as substantial as this for an almost trillion dollar company. I can’t think of any company which has ever done anything similar at this scale. When Intel pivoted from memory to CPUs, back in the 1980’s and at a much smaller scale, at least it was clear that there was going to be significant, growing demand for CPUs. This is not clear at all about headsets beyond niches such as gaming. So they are really jumping into the unknown with both feet.

But I don’t think any more they had a choice.