Meta’s brutal earnings report helps explain its metaverse shift

After years of fretting about the immense power that mobile operating system owners hold over his company, Zuckerberg and his team disclosed Wednesday that Apple’s recent iOS privacy changes are taking a painful chunk out of Meta’s ad revenue. 

Apple’s tweaks, which make it much easier for iPhone users to stop app developers from tracking their smartphone data, limit the ability of Facebook and its customers to target people with pinpoint-accurate advertising.

While Meta officials didn’t specify the financial impact of Apple’s recently implemented privacy rules on the most recent quarter, CFO David Wehner forecasted that the hit will be “on the order of $10 billion” in 2022. The Facebook and Instagram parent reported about $115 billion in ad revenue this past year, accounting for 97% of all company revenue.

The disclosure added to a disastrous earnings call for Meta, which saw its stock plummet by 25% in mid-day trading Thursday. Meta also missed analysts’ profit projections, reported its first user loss in company history, issued an underwhelming forecast for 2022, and surprised investors with the size of its investment in augmented reality, virtual reality, and metaverse projects.

For Zuckerberg, the multibillion-dollar bruising laid down by Apple comes as little surprise. And in some ways, it also validates his intense focus on colonizing the metaverse.

Nearly a decade ago, Zuckerberg recognized that Apple and Google could lord over his company via their respective mobile operating systems and app stores. A single iOS or Android change, like the privacy initiative instituted by Apple in April 2021, could swing billions of dollars in Facebook revenue.

In response, Facebook tried to blunt the strength of Apple and Google by developing its own smartphone, branded in 2013 as the HTC First. When that bombed, Zuckerberg shifted gears, aiming to get ahead of what comes after the mobile device. Facebook spent $3 billion to acquire virtual reality pioneer Oculus in 2014, with visions of creating a new operating system.

“We still have a lot of work to do on mobile, but at this point we feel strong enough in our position that strategically we also want to start focusing on building the next major computing platform that will come after mobile,” Zuckerberg said at the time.

Eight years and one company name change later, Zuckerberg sees the so-called metaverse—likely some mix of virtual reality and augmented reality—as the natural successor to the all-powerful mobile operating system. And he’s doing everything he can to reign supreme in it.

Meta’s augmented and virtual reality division, Reality Labs, spent an astounding $12.5 billion in 2021, while only bringing in only $2.1 billion in revenue. Company officials suggested the majority of costs were tied to employee compensation and research and development expenses.

Analysts expect Reality Labs’ costs will only increase in the coming years, with no guarantee that the metaverse will displace the dominance of Apple and Google. Will the gamble pay off?

“This fully realized vision is still a ways off, and although the direction is clear, our path ahead is not perfectly defined,” Zuckerberg said during Wednesday’s earnings call. “But I’m pleased with the momentum and the progress that we’ve made so far and I’m confident these are the right investments for us to focus on going forward.”

Zuckerberg might be optimistic, but with Meta on track for its worst single-day market performance, investors are hardly convinced.

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Jacob Carpenter

NEWSWORTHY

Hitting the pause button? Shares of Spotify sank 16% in mid-day trading Thursday after the streaming service forecasted smaller subscriber growth to start the year than Wall Street anticipated, Bloomberg reported. While Spotify posted its best quarter to date, adding another 8 million subscribers during the holiday season, company executives were unsure whether the uptick would carry into the start of 2022. CEO Daniel Ek said it’s too early to know whether the fallout from the Joe Rogan controversy over COVID misinformation, which picked up in January, would significantly impact revenues in the first quarter of the year.

That pesky beeping. Tesla plans to recall 817,000 vehicles in the U.S. After discovering that drivers may not hear an alert notifying them that their seat belt remains unbuckled, Reuters reported Thursday. It’s the second recall announced by Tesla this week, following reports that the automaker found about 54,000 vehicles that might roll through stop signs at low speeds without coming to a complete stop. Tesla officials said both issues, neither of which is known to have caused serious injuries, will be resolved through over-the-air software updates.

Super smash records. The Nintendo Switch became the Japanese gaming company’s third-best selling device in history during the holiday quarter, eclipsing 100 million sold and surpassing the Wii console, CNBC reported Thursday. Nintendo reported that it expects to sell 23 million Switch units in its 2022 fiscal year, which runs through the end of March, a fraction short of initial projections reaching 24 million devices. While sales of the five-year-old product are down compared to 2020, the company still scored a 10% year-over-year increase in operating profits for the December quarter, largely on the back of strong game revenue.

A booming business. Yet another chipmaker notched a banner quarter amid the global shortage, as Qualcomm on Wednesday beat Wall Street’s sales and income expectations and issued a sunny forecast for 2022, The Wall Street Journal reported. The California semiconductor and software company posted $10.7 billion in sales and $3.4 billion in net income for the final quarter of 2021, with its chip division netting a 35% year-over-year increase in sales. Fellow chipmakers Taiwan Semiconductor Manufacturing, AMD, and Samsung also boasted strong quarters as chip demand outpaced supply. Qualcomm shares were down 5% as of mid-day trading Thursday.

FOOD FOR THOUGHT

Weaponizing Big Tech? Simmering tensions between the U.S., Russia, and Ukraine could lead to a new frontier in soft war powers—this time involving Silicon Valley. Axios reported Wednesday that President Joe Biden’s administration could cut off Russia’s access to semiconductors as part of a broad suite of sanctions if President Vladimir Putin invades his Ukrainian neighbors. The move would mark a unique use of export bans against a foreign adversary, potentially crippling Russia’s short-term product needs and hurting its long-term technological ambitions.

From the article:

It's not yet clear how broad the semiconductor sanction could be, but a person familiar with the White House's approach told Axios on Tuesday chip restrictions could be aimed at Russia nationwide or targeted more narrowly at specific industries.

A senior administration official told reporters last week the export controls focus on areas that Russian President Vladimir Putin has said are strategically important to the country, including artificial intelligence and quantum computing.

IN CASE YOU MISSED IT

Companies like Nike and Disney are hiring like crazy for the metaverse—and it’s just the start, by Marco Quiroz-Gutierrez

Dating app Grindr may be first major casualty of China’s pre-Olympics campaign to tame ‘bad behavior’, by Yvonne Lau

Kobe Bryant’s estate files for trademarks to join the metaverse, by Kim Bhasin, Luke McGrath, and Bloomberg

Audi and Aptiv invest $285 million in ‘orchestral director’ for self-driving car data, by Christiaan Hetzner

Someone just paid $450,000 to be Snoop Dogg’s neighbor in the metaverse. Here’s how you can live by a celebrity too, by Carmela Chirinos

Outspoken frontman of ’90s band Eve 6 rips Spotify: ‘We want to hurt this company’, by Nicole Goodkind

BEFORE YOU GO

Take me home, crypto roads. As cryptocurrency miners look for locations to ply their trade, America’s coal country is welcoming them with open arms. Political leaders in Kentucky, Virginia, and Wyoming are cutting red tape and taxes that would open their states for more crypto mining, arguing that leftover coal infrastructure pairs well with the modern-day tech. One member of Congress even suggested cool, hollowed-out underground coal mines would serve as an ideal habitat for hot, power-hungry servers. But the idea isn’t sitting well with some coastal politicians, including U.S. Sen. Elizabeth Warren, D-Mass., who worry about the environmental impact.