Facebook’s rebranding to Meta has drawn a fair amount of derision from the social giant’s detractors. But the move is undoubtedly significant – one of the world’s largest businesses is clearly betting its future on the metaverse.
In his monthly column for VideoWeek, Ian Whittaker explains how Meta’s own investment will spark even more outside investment in the metaverse, and how this will all likely play into Meta’s hands in the long-run.
I was initially going to write yet another article on the implications of the metaverse and what it meant. But then I thought, firstly, I would not be able to do it justice in such a short piece, and secondly, there is a potentially more interesting angle when it comes to Meta’s plans; namely the knock-on effects of Meta’s level of spending on the metaverse.
No one can accuse Mark Zuckerberg of having small ambitions when it comes to his plans. He announced on the recent Q3 results conference call that Meta would spend $10bn on the metaverse in 2021 and these costs will rise each year for the next several years. Additionally, as a sign of its intent, Facebook will report its metaverse and related businesses separately in a new divisional line, Facebook Reality Labs or “FRL”.
It is clear this is a long-term project on Meta’s part. The company stated that it would only start generating significant returns on the metaverse in the latter part of this decade, which suggests that the next several years will see a large impact on Meta’s overall profitability.
This was confirmed by Mr Zuckerberg on the earnings call when he stated that margins would go down in 2022. Although slowing revenue growth was blamed, the main factor is likely to be the rapid increase in costs. Facebook’s guidance for operating costs for 2022 is now $91-97bn, up 30-38 percent from 2021. Capital expenditure costs, which do not directly feed into the operating cost line, are expected to rise even faster, with guidance of $29-34bn in 2022, up 52-79 percent over expected 2021 costs.
Some of these increases will come from other areas, but metaverse investments clearly account for a significant proportion. Taking Meta’s comments at face value, it is likely to spend well over $60bn cumulatively over the next five years on realising its metaverse project. That is not a small amount of money.
My point here is that the sheer level of spend is likely to mean the creation of a whole new infrastructure dedicated to servicing the metaverse. Even if no one else developed their own metaverse concepts – and it is clear from the comments of the likes of Microsoft plus more traditional platforms that others will get in on the game – pumping so much money into creating the concept will attract plenty looking to offer their services (and take a cut) to guide clients round the metaverse.
The closest analogy I can think of is the ad tech space. If you think of buying media pre-digital, it used to be very simple. If you wanted to buy advertising on a major platform, you went to a media buyer who aggregated the spending, went to a long lunch with the platform (only joking) and then your spending was done.
However, the rise of digital – excluding direct sales to Google and Meta – has created a whole raft of new players with their own language and acronyms. DSPs, SSPs, ad exchanges etc – there have been plenty of intermediary players who have done very well from the digital revolution.
The metaverse offers to create a similar plethora of intermediaries. Need someone to reach 100m virtual 18-24 year olds (aka real life 45+) to which to sell advertising? Sure, we can do that. This will be particularly the case with e-commerce opportunities (of note – we have already been here before: the video game companies have been selling digital offerings for over a decade).
Thus it would seem what we have here is a classic case of the old adage of “if you want to profit in a gold rush, sell pickaxes”. However, I think there is also another very important point here – namely that the true winner is likely to be Meta. By highlighting publicly how much it is prepared to spend, Meta is helping to improve the chances of its own success. While selling pickaxes is often very profitable, getting others to do your work for you may even work better.