Why the Metaverse (and Meta) Flopped in 2022

Meta Platforms (META 2.72%) reported losses of about $10 billion in its Reality Labs division, which is building out the company’s vision of the “metaverse,” in 2021. And it has already lost more than $10.2 billion on Reality Labs through the first nine months of 2022, with the potential for more than $24 billion in accumulated losses by the time 2022 is fully accounted for. Founder and CEO Mark Zuckerberg said the expense is worth it as it’s helping the company create the next computing paradigm and giving it an opportunity to define the future of technology. 

But investors aren’t convinced. Meta’s stock price is down 60% in the past year, and some are saying the company has lost its way. Let’s look at why Meta’s bet on the metaverse was misguided and why the best move for investors may be for Meta to spin out the business or end Reality Labs altogether. 

Image source: Getty Images.

This hardware obsession is a bad strategy for Meta

In the PC and mobile tech paradigm, the device and operating system were the central point of value creation in the market. Specifically, with PCs, it was the Microsoft Windows operating system and Intel chip. The network effects they created among hardware suppliers and end users drove the industry and led to Microsoft and Intel’s dominance. The more Windows PC users there were, the more developers it attracted, which led to more users, and so on.

Later, Apple became the clear winner (financially) in the mobile era because it had the operating system developers needed to build on and the device users wanted. A combination of applications and the “cool” factor made Apple devices desirable, while the App Store made it easy for developers to deliver their software to customers. Yet in a lot of ways, the mobile era was moving the PC’s capabilities to your pocket.

In both PCs and mobile, the device and operating system mattered a lot to the companies building hardware and software products. 

In the metaverse, it’s entirely possible that the devices themselves don’t matter at all. In fact, in a good metaverse experience the device is abstracted away. And there’s no “cool” factor because no one is going to see whether you’re wearing a $200 headset or $2,000 headset when you’re immersed in the inherently solo physical experience of the metaverse.

What’s more important is that the various metaverses being developed need to be interoperable, which means the access device should be more agnostic than mobile. For example, Meta’s Oculus or HTC‘s Vive headsets can connect to “metaverse-like” meeting apps such as The Wild, Spatial, and Engage. Once in the meeting, it doesn’t really matter what headset you’re using as long as it’s “good enough” to process the experience. 

Walling off a metaverse to one piece of hardware would be unreasonable, so software becomes the key. Meta has focused on the hardware, which is mistake No. 1. 

Users don’t know what they want yet

Many users and developers have struggled with what exactly the metaverse is and what we’re using it for. PC and mobile use cases were extremely clear early on, but we are a decade into building VR headsets, and the best experiences are still slicing blocks to the beat of music (Beat Saber) or a funny job-simulating experience built for kids (Job Simulator). 

Applications are key to any technology platform, and this could be the biggest challenge for the metaverse. Developers don’t know what to build.

Part of the problem is that Meta has sucked the air out of the room in VR and AR development. Its platform is too restrictive for developers and users. Meanwhile, the company is buying up the biggest studios and crowding out small developers. There’s little experimentation the way there was in the early days of PCs and mobile when venture capitalists couldn’t invest enough in the applications of the future.

Meta’s tight grip on devices, the operating system, and application software makes experimentation nearly impossible. That’s mistake No. 2.

Meta investors are saying “Show me the money”

Finally, we can’t forget about money. How do devices, operating systems, applications, assets, and finances work together in the metaverse? Meta has tried a low-margin consumer headset, is now offering a higher margin “pro” headset, and is taking a page from Apple’s book and taking a 30% “platform fee” for selling content through the app.

As Meta pours billions of dollars into the metaverse, investors, developers, and users don’t know what to expect or what’s working. That makes building partnerships difficult, especially with the small companies that would be developing innovative solutions for the metaverse

There’s a tension between Meta’s investment scale and what developers need to make their software profitable. As a result, no one is making money and we see mistake No. 3 developing. 

Too much scale, not enough spaghetti

In the nascent phase of a new market, it’s critical to test a lot of products to find product market fit. When the right fit is found for hardware and software, it can then be optimized and grow organically. Often that leads to a small group of winners, where Meta hopes to be.

Instead, Meta crowded out the VR, AR, and metaverse space. The only products being tested are either living on Meta’s platform or fighting tooth and nail to survive on a smaller platform. We need more developers, entrepreneurs, and VCs throwing spaghetti at the wall and seeing what sticks. 

The metaverse was one of the biggest disappointments of 2022, and it wasn’t for lack of money invested or talent engaged in building. Business models matter. We don’t know what the best metaverse business model is because there hasn’t been enough space to test new concepts.

I don’t think the idea of the metaverse is dead, but Meta’s thought that it’s a computing paradigm and its strategy of trying to own the metaverse may have put the movement five to 10 years behind where it would have been otherwise. Investors who are bullish on the metaverse’s future may have to push their time horizons out even further as a result and try throwing more spaghetti at the wall to see what sticks. 

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Travis Hoium has positions in Apple and Intel. The Motley Fool has positions in and recommends Apple, Intel, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long March 2023 $120 calls on Apple, short January 2025 $45 puts on Intel, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.