Metaverse and VR: No one cares

Mark Zuckerberg has sent out a “chilling” message to Meta’s staff, stating that the company will be scaling back hiring, and this strikes me as an indictment on VR (and that Meta isn’t particularly well run).

VR has earned some mindshare in recent years, but it’s still a fledgling industry. The technology is expensive and not very good at the moment which limits the addressable market, but the situation is improving slowly over time. The key word there is slowly: the VR industry has a smaller market cap than the music streaming industry, and that’s unlikely to change in the next few years. Making a great VR headset is hard, and then distributing that VR headset to every household is even harder.

The “metaverse,” on the other hand, isn’t even a fledgling industry. While there are VR headsets available for purchase, there are no publicly accessible metaverses unless you stretch the definition to include Roblox or Second Life (by the way, Second Life’s creator doesn’t think highly of the metaverse either) and nobody knows when Meta is actually going to launch anything in this space. To be honest I’m not even sure that anyone cares about Meta’s roadmap, because it’s not clear to me anyone cares about metaverses in general outside of tech and scifi communities. Look at the Google Trends data for the term “metaverse” against “ariana grande,” for instance. It’s pretty stark.

As popular as Ariana Grande might be, the metaverse only having a fraction of the mindshare she has is not great.

Meta is in a shaky position. Their only real business is advertising, and advertising isn’t a great industry to be in right now. Apple’s app tracking transparency feature introduced in iOS 14.5 has had a massive effect on the industry, and people all around the world are growing increasingly privacy conscious in light of scandals like Cambridge Analytica and some of the research coming out of companies such as Meta. More broadly, expansive privacy legislation such as GDPR acts to disincentivize companies from amassing personal information to power advertising engines by increasing compliance costs and introducing harsh penalties for mishandling of data.

Frankly, Meta is not a particularly well run business. Putting all your eggs in one basket—in this case advertising—is acceptable when you’re a small scrappy startup desperately trying to find product-market fit, but at Meta’s scale it is extraordinarily risky.

Google also makes a lot of money from advertising, but they’re diversified across a number of other verticals as well. Consider the following:

• Google earns a substantial amount of money from selling Workspace seats to companies all over the world, and this business is growing
• Their 30% cut of all Play Store transactions translates into $10b+ of revenue each year
• Their hardware division is extremely successful—virtually every child in the US is using a Chromebook for school, and their own in-house Android devices are quite attractive
• Google Cloud effectively translates into them taking a small cut of the entire tech sector’s revenue—in some ways hedging against their own products’ potential demise
• And underpinning all of this is one of the stickiest ecosystems around. They’re probably the only company in the world capable of competing with Apple on ecosystem

While Meta does have other business units on paper, they just aren’t terribly impressive. Meta Workplace is tiny in comparison to other offerings, and the Oculus business has limited upside. They might have WhatsApp and Instagram, but these offerings share the same flawed business model of the Facebook platform: an over-fixation on advertising revenue.

When Facebook rebranded back in November, it felt to me like a desperate ploy to find something to bail them out of the death spiral they have found themselves in. Meta needs a new profitable business unit if they want to secure their longterm future, and doubling down on their VR investments seems to be the strategy they’re going with.

In some ways it’s understandable—what other markets are there? Cloud platforms are hard to set up; developers are comfortable with what they already know and use. The mobile phone industry is packed—it would be hard enough in the first place for Meta to come out with a differentiated offering, without then also needing to also convince privacy-conscious consumers to trust Meta with the entirety of their digital lives.

Where else, then? Google has held search in an iron grip since forever. Microsoft owns the enterprise space completely, and their combination of Visual Studio, GitHub, Azure, and .NET grants them a lot of mindshare amongst software developers. When I survey the biggest New Zealand tech companies like Trade Me, Pushpay, or PartsTrader they are all heavily invested in the Microsoft stack.

There isn’t an obvious market which Meta can move into. Realistically they need an entirely new product—but as a company they’ve been stagnant for about a decade. None of Instagram, WhatsApp, and Oculus were invented by Meta: they are all acquisitions. And when you peer at the evolution of these platforms, you see that a lot of energy is being invested into adapting features from other platforms. Stories were taken from Snapchat, Reels from TikTok, and last year they were working on a ClubHouse clone.

So: VR is the only play they really have, and it’s a terrible one. It cannot be overstated how absolutely terrible VR technology is right now: the headsets are uncomfortable, there are only two good apps (VRChat and Half Life: Alyx), a substantial proportion of users experience motion sickness, and the people pushing this technology have no understanding of why it might actually be appealing.

What is that size of a market whose devices get used an average of six hours a month? And how many headsets can you realistically sell when 40-70% of the population experience nausea using them? The Oculus Quest 2 costs as much as an entry level iPhone, and I guarantee the iPhone offers more utility.

And so many of the apps focus on “immersion” to the detriment of the overall experience. VR should be about exploring new modalities of interaction—not exploding users’ sensory systems with synthetic impulses. A great movie (on a 2D screen!) or book immerses you without the need for futuristic haptic suits or janky finger tracking mechanisms.

And perhaps we can solve these issues. Headsets will get better and cheaper, and fantastic apps are sure to come eventually—but this is a really bad place for Meta to be in. The first mover in tech almost never winds up winning: Facebook was far from the first social network, Google wasn’t the first search engine, Microsoft didn’t make the first home operating system, and Xerox could only sit in impotent rage while Apple and then Microsoft successfully executed on the GUI.

Before you move into a blue ocean, you need to answer the question of why nobody else has attempted to participate in your chosen market. People like making money—I certainly do—and so if a “three trillion” dollar opportunity is seemingly staring you in the face, you need to have a really good explanation for why you in particular are the person for the job.

The concept of VR is great. The execution of the idea right now is horrible. I’ve used most of the VR headsets available on the market (including the Valve Index—which isn’t officially available in New Zealand) and they just aren’t great. In 5-10 years they might be, but that’s a risky bet to make and a long time to spend burning billions per year.

Consider how triumphant Meta made its rebrand sound compared to how the company is operating today. There’s a massive hiring freeze in place, they haven’t come out with any new products, only enthusiasts care at all about VR and absolutely no one cares about the metaverse.

You can see Meta’s failure reflected in their stock price: currently they’re down twice as much YTD than Google, Apple, or Microsoft and it all comes down to their lack of diversification and foolhardy gamble on VR.

VR isn’t ready for primetime, and investments in this sector are incredibly risky. Until the tech gets substantially better, nobody will care about VR or the work that company’s are doing in the space.