The Metaverse – Mean Reversion

Meta has returned to seeding the market.

• Meta’s Reality Labs has had a good 2024 from a sales perspective but this is because Meta has returned to seeding the nascent Metaverse market as losses in 2024 are likely to be the biggest ever.
• According to an internal memo, Reality Labs has beaten its sales targets and grown 40% YoY most likely spurred by strong demand during the holiday season.
• This is because the companion app needed to set up a Quest device was the No.1 free app on the Apple App Store on Christmas day, a crown it has subsequently lost.
• It is also worth noting that 2023 was the year of efficiency where Meta’s subsidisation of Quest devices was curtailed as a cost-cutting measure and sales weakened as a result.
• Consequently, all we are seeing is a reversion to the mean where subsidisation of the hardware has resumed, meaning that the devices have become more affordable.
• This is not a sign of a take-off of the Metaverse, but it is a sign that Meta is absolutely determined that it will not be a hostage to Apple and Google like it is in smartphones and that it will have its own platform upon which to launch its ecosystem.
• This strategy is working as Meta Horizon OS is the go-to place to develop an app or service for the Metaverse but the flywheel effect is very far from being in motion.
• This is the goal of all ecosystems and is the time when more users trigger more developers to write apps which in turn triggers more users to join and so on.
• What is happening now is that Meta is artificially growing the user count so that developers will continue to develop for the platform with the hope being that at some point, it can take its thumb off the scale.
• The problem is that I think that this is going to take a while as the barriers to the take off the Metaverse have not moved much in the last 2 ½ years.
• These remain mostly technical in terms of size, weight and comfort but most importantly, everyone is still insisting on doing their own platform.
• This creates what RFM refers to as “a surfeit of silos” (see here) meaning that the promise of a single digital environment where all users can communicate with and interact with everyone else remains unfulfilled.
• Unless there is complete interoperability between the different players, the Metaverse is not going to take off and has no chance of replacing the smartphone as the place where users live their digital lives.
• The last few years have seen some progress on the technical side in terms of visual quality and integration of the virtual and real worlds but in terms of interoperability, nothing has changed.
• Hence, the Metaverse is still on a trajectory to be a niche digital destination as opposed to the next digital revolution as its proponents suggest.
• I can see Meta making Horizons OS available to open source like Android but whether anyone is willing to become dependent on Meta for a platform remains to be seen.
• This is why the games engines (Unity and Unreal Engine) are worth watching as almost everyone uses one or the other to render the 3D worlds that they are creating and so they represent a possibility to bridge the gap between the different players.
• However, this plays out, it is likely to take some time as progress has been slower than expected and the production of a device with a decent user experience remains elusive.
• I continue not to expect this before 2026 or 2027 at the earliest meaning that mass market takeoff would not be expected before the early 2030s at the earliest.
• Hence, this remains a waiting game and a theme that remains fairly uninvestible as many of the players are already publicly listed but their performance is dominated by other themes.