Meta's Metaverse investment is "terrifying, even by Silicon Valley standards", investor says
Meta is facing the biggest crisis in its 18-year existence. Now an investor is publicly calling on Meta to rethink.
"I have to underscore that we are in serious times here and the headwinds are fierce," warned Meta's chief product officer Chris Cox in a leaked memo this summer.
An accurate assessment. Meta's growth is slowing, plus it's losing market share to TikTok and billions in ad revenue due to Apple's privacy measures. The answer to this crisis? Meta is investing even more in VR and AR, technologies that won't yield much profit now or in the next five years.
The result: Meta's shares have lost two-thirds of their value since September 2021. The entire market is down, but it is still significantly more than other technology companies of this size have lost in value over the same period.
In response, Meta has taken initial steps to cut costs: The company shut down several Metaverse projects and announced a hiring freeze, budget cuts and restructuring in late September. Meta will be smaller in 2023 than it was last year, Mark Zuckerberg said.
Investor group urges frugality
For some shareholders, that's not enough. Two days before the announcement of the next quarterly results on October 26, the founder of the investment firm Altimeter Capital demands radical cost-cutting measures from Meta.
In an open letter to Mark Zuckerberg and the company's board, Gerstner's group demands that Meta be made "fit" again. Meta, Gerstner says, like many other companies, has "drifted into the land of excess."
"Like many other companies in a zero rate world — Meta has drifted into the land of excess — too many people, too many ideas, too little urgency," Gerstner says.
To regain investor confidence, he says Meta needs to regain its "mojo." Gerstner proposes a plan consisting of three measures with a clearly defined goal: Meta must double its cash flow to $40 billion a year.
Metaverse investment is "terrifying, even by Silicon Valley standards"
The plan calls for Meta to cut the number of employees by at least 20 percent (this would affect approximately 17,000 employees), reduce annual investment costs by at least $5 billion ($25 billion instead of $30 billion), and limit investments in the Metaverse,
The Reality Labs division, which is responsible for the Metaverse, VR and AR, should cost no more than $5 billion annually, according to the plan. Currently, Zuckerberg plans to invest more than twice that amount annually.
Investments in "critical areas" such as artificial intelligence, which Gerstner's group calls "the future," are not to be affected by the austerity measures. The investor sharply criticized Zuckerberg for his radical Metaverse pivot, which he said had led to much "confusion."
"Perhaps it was the re-naming of the company to Meta that caused the world to conclude that you were spending 100% of your time on Reality Labs instead of AI or the core business. Whatever the reason, that is certainly the perception", Gerstner says. "An estimated $100B+ investment in an unknown future is super-sized and terrifying, even by Silicon Valley standards."
Will there be a return ticket from the Metaverse?
Meanwhile, it is unlikely that Zuckerberg will turn around at the behest of the investor group and drastically scale back his Metaverse plans. For that to happen, the economic pressure on his company would have to continue to increase enormously.
With the renaming to Meta, a point of no return was reached. Zuckerberg was probably aware of this before he set in motion his company's most radical pivot. In a recent interview, Zuckerberg said he enjoyed being challenged and questioned.
Because Zuckerberg holds a majority stake in Meta's stock, he doesn't have to bow to pressure from shareholders and Meta's board. This absolute position of power for a CEO is unique among large technology companies and explains why Zuckerberg was able to embark on his Metaverse adventure in the first place.
This is basically an all-or-nothing bet. After ten years, virtual and augmented reality is still dependent on Zuckerberg's Metaverse enthusiasm. If Zuckerberg even hints that he is turning away from the idea of the Metaverse, it would send shockwaves throughout the industry and slow down, if not stop, further development.