- Loonshots
- Core Business
- Metaverse Vision
- Conclusion:
Please note: this is part one of a series of writings and research reports on $META.
Loonshots:
A loonshot is defined as a technological breakthrough that disrupts the fabric of society, however prior to worldwide acclaim has been beaten down, trivialised and demonised.
The story of loonshot innovations is scattered throughout history, ranging from the invention of statins, the development of the radar, all the way to the creation of the James Bond franchise. History often rhymes, and within the case of Meta, this could represent a true loonshot innovation that disrupts and improves upon the very nature of societal fabrics.
Thus, I do not believe that is it trivial to demonise Meta & their business model yet. In reality, this company and their new initiatives have yet to been proven.
At the core, Meta is focused on the foundational hardware and software required to build an immersive, embodied internet that enables better digital social experiences than anything that exists today.
Core Business:
User Growth:
The core business I would characterise as being “steady”. Whilst it seems evident that there is limited exponentiality ahead for the core business, this does not remove from the impeccable innate strengths of social media platforms via network effect creation.
When looking at the Family Monthly Active People (Billions), Meta proves to show increasingly steady figures. with over 3.71B individuals’ login in and using one of Facebook’s family products. Family Monthly Active Users (MAP) is defined via the following: “a registered and logged-in user of one or more of Facebook’s Family products who visited at least one of these products through a mobile device application or web browser in the last 30 days.”
The products provided by Meta are increasingly engrained within our everyday lives, from business, to commerce, and social interactions. Meta lays at the foundation of these societal domains.
Apple IOS:
Interestingly, Meta has been overcoming major headwinds, specifically the Apple Privacy Changes, in which now incentives users to “opt-in” regarding the sharing of data. Mark Zuckerberg has reiterated countless times that Apples’ privacy changes do pose risks for the company’s financials and revenue growth.
Recently, just in Q3 22, Mark Zuckerberg said the following: “you see dynamics like what Apple has done with ATT and continues to do in some ways with the policy that they announced yesterday, which are obviously big risks, and we see as issues.”
“We’re also continuing to face targeting and measurement headwinds such as Apple’s iOS changes,
which we believe are contributing to the growth challenges across the digital advertising industry.”
However, whilst these comments may seem concerning at first, Meta are attempting to solve this issue via investments in AI & ML: “we’re going to do it in rolling out products, like we have recently, that help us, and advertisers measure where we’re sharing less data between.”
“Our approach here is to grow first-party understanding of people’s interests by making it easier for people to engage with businesses in our own apps — whether that’s through business messaging, shops, or new ads products.”
Fundamentally, the change from Apple, on-top of the increasingly stringent regulatory environment is resulting in a lack of data to deliver personalised advertisements. When looking at the average revenue per user, and family average revenue per person, the figures follow a strikingly similar trend. On the Average Revenue Per User (ARPU) front, the statistics over the past few quarters are shown below:
- Q3 21: $10.00
- Q4 21: $11.57
- Q1 22: $9.54
- Q2 22: $9.82
- Q3 22: $9.41
As can be seen, from Q4 21, to Q1 22, there is a staggeringly stark increase within revenue deceleration that can be seen. Similarly, is true for the Family Average Revenue Per Person metric:
- Q3 21: $8.18
- Q4 21: $9.39
- Q1 22: $7.72
- Q2 22: $7.91
- Q3 22: $7.53
Thus, as can be seen within ARPU metrics, there is a deceleration in the revenue from each user after the introduction of the Apple IOS Privacy changes. Any further changes by Apple could be detrimental to the success of Meta to capitalise on average revenue metrics.
Macroeconomic Conditions:
Within a recession, or hard economic period, there is clear evidence to show that advertising spending is cyclical for companies. During times of harsh macroeconomic conditions, often companies view advertising on social platforms as a more “discretionary” spend, and thus cut back on this significantly.
“Weak advertising demand, which we believe continues to be impacted by the uncertain and volatile
macroeconomic landscape”.
As reiterated by Google’s CEO: “The growth in our advertising revenues was also impacted by
lapping last year’s elevated growth levels and the challenging macro climate.”
Whilst this is a shorter-term issue, over the long term, it is clear that Meta is proving to provide fairly stable advertising revenues, highlighted via their digital advertising revenue share.
However, whilst staying this, if anything this shows the increased level of resiliency of the applications, in which have managed to thrive in increasingly competitive periods, with harsh macroeconomic conditions impacting advertisers, as well as the IOS privacy changes causing significant signal loss for advertisers.
Reels:
One main emphasis going forward is the focus on reels, and short form content creation.
“Our AI discovery engine is playing an increasingly important role across our products — especially as advances enable us to recommend more interesting content from across our networks in feeds that used to be primarily driven just by the people and accounts you follow.”
“Reels, continues to grow quickly across our apps both in production and consumption. Now more than 140 billion Reels plays across Facebook and Instagram each day – a 50% increase from six months ago. Reels is incremental to time spent on our apps. We believe that we’re gaining time spent share on competitors like TikTok.”
When moving to monetization, in the past the growth of short-form video content has proven to create challenges since reels does not monetise at the rate of feed or stories yet. Thus, this means that as reels is growing, there is a displacement of revenue from higher-monetising surfaces. CEO Zuckerberg noted that the closing this gap “is also a high priority”.
Due to increasingly large breadth of products available by Meta, this allows ample potential revenue sources for the company to capitalise on. One of these fairly untapped domains is messaging, via the use of WhatsApp, and Messenger specifically. More advanced product features are slowly being rolled out in this department, namely Click-to-Messaging ads. This let’s businesses run ads on Facebook and Instagram that start a thread on Messenger, WhatsApp or Instagram Direct so they can communicate with customers directly.
Other Opportunities:
However, also other youthful sources of revenue. “Paid messaging is another opportunity that we’re starting to tap into, and it continues to grow quickly but from a smaller base. Foundations are being put in place now to scale this with key partnerships like Salesforce, which lets all businesses on their platform use WhatsApp as the main messaging service to answer customer questions, send updates, and sell directly in chat.”
Holistically speaking it is clear that the Meta business is fairly steady. Whilst many would call this stagnant, I disagree. You see, Meta provides staggeringly sticky tools and applications in which are now engrained in the everyday lives of individuals. Thus, it seems illogical to assume that the users of these platforms leave the platform.
The beautiful aspect of social media platforms is that these products provide increasingly strong network effects. To explain, if one individual is not within the social media ecosystem, this creates non-trivial levels of isolation and perceived disconnectedness.
In light of the advancements to mitigate the risks associated with Apples IOS changes, notably via the use of AI to close the gap between data and advertisers, on top of the eventual changes that will occur on a macroeconomic level thus gradually incentivising companies to spend more on advertisements, the future of the Meta core business seems fairly “steady”.
Opposing Debates:
There are however outstanding debates that must be questioned when theorising about the steadiness of the Meta core business.
Firstly, one may argue that the core business for Meta is not “steady”, however instead proves to be increasingly stagnant. The growth rate of users evidently has slowed down over the past few quarters, solely providing a marginal increase for the upside in user growth monthly, and daily. To add, in light of the increasingly competitive “attention” economy, this slowdown should become a point of concern.
Other platforms are now aggressively in competition for attention. Just in the past few months alone, there has been two important events to note within the attention economy. Firstly, the introduction of a new social media application, namely BeReal, in which has rapidly grown in popularity over the past months. Secondly is the purchase of Twitter by Elon Musk, who appealing aims to create a “digital town square” for commerce, video, audio and regular commentary. Both of these events highlight the necessity of attention in the digital economy, and how this daily is becoming an increasingly competitive scene.
Only 206 million users access Twitter daily, which is dramatically down from METAs 1984M daily regulars to the platform. Thus, there is staggering upside for user growth in the case of Twitter, in which once again could prove to become another headwind against Meta’s leadership.
Furthermore, on-top of all of this tense competitive environment, Meta unfortunately is solely an application provider, in comparison to an infrastructure platform. Therefore, Meta is constantly at the helm of infrastructure platforms, such as Apple, when it comes to privacy changes and the ability to fairly significantly alter the methods in which Meta can monetise data. Therefore, there is always going to be a major headwind over Meta, in which is the potential for a dramatic change by Apple to their IOS Privacy settings.
In this case, Meta is stuck between a rock and a hard place.
Whilst steps are being made to mitigate some of these challenges, there are valid debates and concerns over the power that Apple has regarding the monetisability of data on Meta’s platforms.
The conjunction of limited monetisability associated with revenue per user, on-top of the seemingly slowing user growth, this should be a cause for concern for investors.
Just as a brief summary, there are 3 main outstanding debates for Meta regarding the core business:
- Stagnating User Growth:
- Increasingly Competitive Attention Economy:
- IOS Privacy Changes:
Metaverse Vision:
What Actually Is The Metaverse?
Meta at the core, despite the trivialisation of the idea, are aiming to build the next generation of computing platforms. In the modern date, there is a static, two-dimensional approach towards computing and the internet. Static monitors are used as a portal into the digitalised internet; however, this comes with various archaic limitations.
Meta, however, wants to change this.
Instead, Meta wants to focus on interoperability of the digital and physical world via the use of AR & VR. The potential for true immersion regarding digitalised presence will result the unlocking of “hundreds of billions of dollars, if not trillions, over time”, according to CEO Mark Zuckerberg.
Thus, at the core, the Metaverse represents an interesting inflection point in human history, which is the first iteration of true interoperability between the physical and digital world.
CEO: “It enables deeper social experiences where you feel a realistic sense of presence with other people, no matter where they are – whether you’re playing games or working for hours at a time, or you’re just jumping in for just a minute at a time to say hi to a friend or collaborate on a project quickly.”
Meta is focused on the foundational hardware and software required to build an immersive, embodied internet that enables better digital social experiences than anything that exists today.
Issues With The Current Computing Infrastructure:
As humans in daily life, we operate via the interoperability of senses, in which work in conjunction simultaneously. This includes the use of smell, sight, and touch, in order to successfully navigate the world. However, from a digitalised perspective, this four-dimensional innate human superpower, is instantly retracted to a static, two-dimensional confinement.
To explain further, this two-dimensional field thus fails to provide an adequate sense of immersion and feel. In consideration of the fact that Meta is at the core a social media company, this is a huge emphasis. The unlocking of true computational immersion could result in countless use cases. For example; removing the boundaries upon which people work, thus allowing people to work wherever, whilst still maintaining a realistic sense of connection. Also, the ability to fully replace laptops, monitors and PCs, via the introduction of immersive, accurate, and realistic, AR. This could all be achieved through a small wearable infrastructure, with resemblance similar to that of subtle glasses.
The interconnectedness of humans, and AR together, would enhance productivity drastically. Perhaps in a manufacturing sense, to identity nuanced details regarding which materials are to be used. Or, even within the healthcare sector. Via the introduction of an immersive, embodied internet, this could provide healthcare emergency operators with enhanced levels of detail, and accuracy regarding a certain operation in real time. All achieved solely through a small wearable physical infrastructure.
The creation of the next generation computing platform, namely an immersive, and embodied internet, would blur the boundaries between physical reality, and the digital world, thus unlocking unimaginable use cases in which would dramatically enhanced productivity and utility.
Often the most important breakthroughs within business rarely follow blaring trumpets, or red carpets. Instead, these companies are often incredibly fragile. They pass through dark tunnels, after a range of scepticism and uncertainty. Often these companies are dismissed or neglected for some time.
Metaverse Investments:
On the R&D front, there has been significant increases in R&D over the past quarters, and months.
Furthermore, whilst R&D is expanding significantly, this does not seem to slowdown any time soon. In fact, R&D associated with Reality Labs is solely going to increase again.
“We expect Reality Labs expenses will increase meaningfully again in 2023, with the biggest drivers of that being the launch of the next generation of our consumer Quest headset and hiring that’s been done in 2022 but for which we’ll be paying the first full year of salaries next year. For 2023, we expect capital expenditures to be in the range of $34-39 billion, driven by our investments in data centres, servers, and network infrastructure. An increase in AI capacity is driving substantially all of our capital expenditure growth in 2023.”
The overall headwind in which investors are currently grappling with is the fact that Meta is investing significantly within the Metaverse, with lowering revenues, combined with a potentially stagnating core business. Many investors are concerned regarding the viability and the necessity for the Metaverse.
Competition:
Solely from a competitive perspective, Meta is not the only company who is building out the future of the next immersive and embodied internet. In fact, some companies have been working on this for years prior to Meta’s initial announcement.
For example, Microsoft has a new VR product, namely the HP Reverb G2. Apple is rumoured to launch their new VR product too. Media within the recent times announced that “the Apple AR/VR headset, which may be called Reality Pro or Reality One, will cost more than a Mac.” Thus, it seems evident that competition is amply heating up.
Often, I tend to shy away from buzzwords, as commonly these buzzwords are a tell in which highlights the fact that the set product or company is part of a trend, and thus by definition is perfectly competitive, and not monopolistic.
To garner a successful investment, I firmly believe in the principle of proprietary technological moats. Namely, the necessity to have 10X better technological advantages over any other viable competitor. Marginal improvements are not sufficient to lead to a viable monopolistic practice.
Every successful company is a function of monopolistic practices, and thus having a significant technological edge can provide companies the ability to garner this monopolistic advantage.
Please note: this is part one of a series of writings and research reports on $META.
Conclusion:
To conclude, it seems that there are considerable outstanding debates for Meta, both on their core business, and simultaneously their new initiative into the Metaverse. However, this does not instantaneously result in an inability for an investment.
Regarding the core business, there are 3 main pressingly important outstanding debates:
- Stagnating User Growth:
- Increasingly Competitive Attention Economy:
- IOS Privacy Changes:
Whilst at first glance this may seem concerning, there are some more optimistic nuances that must be identified too.
Regarding the potential for a stagnation in user growth, Meta seems to be avidly counteracting this growth continually. Whether this is via the introduction of new products, emphasis on reels, and even the focus on AI generated investments. Importantly, Meta is not losing users. The company is reaching a staggering 3.7 billion people monthly across our family of apps.
The innate nature of social media platforms, via the generation of severe network effects, concludes one to believe that this growth is not going to instantly vanish.
Thus, the growth is steady, however is not going to exponentially grow any time soon.
The concern is, with the increasingly competitive attention economy, this could drive eyeballs away from Meta, towards other trendier platforms, such as Twitter. Once again, Zuckerberg seems to believe that reels, and new initiatives on the AI side will incentivise usage of the platform, thus retaining attention.
Another significant and concerning headwind for Meta is the grip that Apple has over the company, via the IOS Privacy initiatives. This will continually hang over as an outstanding debate for Meta. Furthermore, whilst Meta is aiming to bridge this gap via AI and new products, any small change from Apple’s side could result in more damage to the data collection efforts for Meta. Once again, this may significantly impact revenue and ARPU.
Importantly to highlight is the following question: are these changes solely secular trends, or are these changes more cyclical shifts.
For the new Metaverse initiative, there are also considerably more outstanding debates:
- Competitive landscape
- Utility of Metaverse
- Confusion over managements leadership & vision
At the core, Meta is focused on the foundational hardware and software required to build an immersive, embodied internet that enables better digital social experiences than anything that exists today.
If this does pay off however, this could result in the unlocking of billions, if not trillions of dollars in value captured.
