Meta is breaking records in virtual reality… but its social networks are suffering in the face of TikTok and Apple

Meta is breaking records in virtual reality... but its social networks are suffering in the face of TikTok and Apple

Meta Platforms, formerly Facebook, presented its annual results on the evening of February 2nd. The year 2021 marked a crucial turning point for the company in more ways than one. First of all because it has reaffirmed its ambition in virtual and augmented reality technologies, which it now groups under the name “metavers”.

But also and above all because its historical business – targeted advertising backed by its social networks – has suffered several hard blows (Apple’s new advertising policy on the one hand, the invalidation of the Privacy Shield on the other) that directly affect its finances.

One of the indicators to remember is that the number of daily Facebook users decreased in the fourth quarter of 2021, from 1.93 to 1.929 billion users. This is the first decline in 18 years. This is only a decline of a million, but it is indicative of the exhaustion of the social network, especially among young people. Instagram’s numbers don’t look much better. The company does not disclose them in detail, but the overall increase in users of all its applications combined (which also includes WhatsApp) has been about 10 million people, the sign of a possible stagnation.

The culprit is all found: TikTok, an application for creating and sharing short videos developed by the Chinese company ByteDance and whose success has been explosive for a few years. To counter this newcomer, Mark Zuckerberg and his teams are counting on Reels, a similar feature integrated into Instagram. It is the content format with the highest growth within the social network according to the manager, however its monetization is still incomplete to date.

Mark Zuckerberg had announced last year his wish to redirect Facebook to an audience of young adults, and this while the social network has slowly calcified over the past 10 years around senior users. This ambitious and complex step backwards to implement is still far from having a concrete effect.

Advertising revenue bludgeoned by Apple
However, Meta is not out of money. Its profits amounted to almost $ 40 billion in 2021, which is 10 billion more than in 2020, with a turnover of $ 33 billion in the last quarter. The catch: this revenue comes mainly from advertising, and one of the key platforms on which it operates – iOS – has sharply reduced its performance at this level by implementing a new policy for authorizing advertising practices.

Meta’s Chief Financial Officer, David Wehner, warned investors that we should expect a slowdown in growth as a result of these measures, estimating a loss of around $ 10 billion in revenue over the year 2022 (Meta recorded $ 118 billion in revenue in 2021). Meta will obviously try to circumvent these limitations by modifying its advertising targeting technologies, but the task will be tough. Especially since within the European Union, it must face the invalidation of the Privacy Shield, and therefore the prohibition of sending the data of its European users on its servers in the United States.

These unfavorable forecasts, combined with the worse-than-expected results, were severely punished by the financial markets. On the day after the announcement, Meta’s stock price fell by 26%, a $234 billion valuation loss (the company going from $895 billion to $661 billion in a single day). A dizzying tumble.

Reality Labs reveals its revenues
In parallel to all this we find Meta’s activities in virtual and augmented reality. This is the positive point for the company, whose efforts for almost eight years (when it bought the start-up Oculus VR) are beginning to bear fruit. Revenues related to its Reality Labs division (which encompasses the entire ecosystem formerly called Oculus, but also Spark AR, Portal devices and R&D activities) amounted to $ 2.3 billion in 2021. This is the first time Meta has reported them separately when presenting its financial results. We also learn that they have doubled from year to year since 2019, from 501 million to 1.1 billion, and then to 2.3).

More specifically, the company raised $ 534 million in the first quarter of 2021, $305 million in the second, $558 million in the third and finally $877 million in the last quarter, a good result driven by the record sales of the Meta Quest 2 during the end-of-year holidays. Meta does not reveal how many devices it sells, but estimates from various industry observers agree that the 10 million copies sold have probably been exceeded.

$1 billion in purchases for the Quest ecosystem
This has repercussions on the application ecosystem, and this is undoubtedly the best news that Meta had to announce at the conference. Quest headset users have spent over a billion dollars on content to date, a symbolic milestone for this niche market that is finally starting to spread its wings.

Chris Pruett, who heads the content ecosystem at Meta, said that eight titles generated more than $20 million in gross revenue (that is, before Meta took its 30%), 14 titles exceeded 10 million, and 17 titles went beyond 5 million. In total, 120 applications have passed the million-dollar revenue mark. This is double the figure reported in January 2021 (60 applications) and six times more than in 2020 (there were only 20 titles above the million then).

$10 billion in losses for AR/VR
However, despite these record revenues, this division is experiencing losses of $10.2 billion in total. The fault lies with the extensive R & D that Meta is engaged in, which is betting its future on these technologies. Its expenses have steadily increased over 2021: 1.8 billion losses in the first quarter, 2.4 billion in the second, 2.6 billion in the third and 3.3 billion in the last quarter. They will continue to grow in the future. Mark Zuckerberg’s bet is to establish himself as one of the reference platforms of the next great computer era (post-smartphone) to no longer be at the mercy of competitors like Apple or Google.

Goal 2030
The main difficulty he has to face is that the democratization of these technologies to the general public and for uses in everyday life is still a long way off (5 to 10 years at the very least). The Reality Labs division will continue to generate losses until then, which means that the historical business must remain performing in the meantime in order – among other things – to finance it. Meta must try to maintain the balance between these two activities if he intends to succeed in transforming himself as he wishes. Added to this will be the future competition of actors like Apple… or ByteDance.

Mark Zuckerberg touched a few words in passing about the ongoing projects. Cambria, the company’s high-end mixed reality headset, will be unveiled as planned this year and will be positioned in a premium segment. The Nazaré project, which concerns lightweight augmented reality glasses that can be worn all day, is progressing at a good pace.

And the social applications grouped under the Horizon brand, which are intended to become interconnected in the long term, will form the heart of its “metaverse” strategy. Horizon: Worlds should also be available on smartphones during the year to allow more communication between users of “classic” social applications and those evolving in virtual reality. Note that it is only available in North America at the moment.

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