Facebook has rebranded as Meta.

day 23.11.2021 * Reading time: 10min.

 
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Facebook has rebranded as Meta.

 

Whether it’s a ploy to shake off the bad press (and regulatory scrutiny) that has followed Facebook in recent years, or is the pre-emptive move in the face of the report on the monopoly of large technology companies issued by the US Congress in October 2020, in which it demanded stricter antitrust regulations and the introduction of new regulations limiting the influence of dominant companies, or a new desire to be more than just a social media platform, the tech giant will now focus its efforts on bringing “the metaverse to life” and assisting people in “connecting, finding communities, and growing businesses.” For those who are unfamiliar, the metaverse is commonly conceived of as an immersive online 3D world in which you may interact with several other users via avatars. “The metaverse will seem like a mash-up of today’s online social encounters, extended into three dimensions at times or projected into the physical world.”

Interest spiked after Epic Games announced a US$1 billion funding round devoted to its “long-term vision of the metaverse”. The metaverse is a concept that’s been floating around tech for decades, and it is legitimately interesting. There are 10 million transactions every day on the World of Warcraft game platform, with some items trading for the equivalent of nearly US$1000. Fortnite, which was “once a relatively simple game in which 100 strangers fought one another elimination-style for sole possession of an island over and over again, it’s now a multibillion-dollar enterprise that hosts concerts and movie premieres. Its publisher, Epic, is all-in on the metaverse hype.

Facebook’s most valuable asset is its social graph, its dataset of users, links between users, and their shared content. In a metaverse future, we’ll all have identities on the metaverse, and anyone can open a virtual space for sharing photos or opening a discussion. A cloud of bad publicity has followed Facebook over the past few years. Who could forget its Cambridge Analytica scandal, or the widespread media coverage of its dissemination of hate speech, or documentary The Social Dilemma, and most recently, the Facebook Papers released by whistleblower Frances Haugen, which in her words, reveal that Facebook repeatedly puts “growth over safety”?

In 2014, Facebook acquired Oculus VR for $2.3 billion. Oculus was a Kickstarter-backed venture with a head-mounted virtual reality display in pre-production that was targeted mainly at immersive video gamers. The deal was controversial, but co-founder and boy genius Palmer Luckey defended it on Reddit: “I guarantee that you won’t need to log into your Facebook account every time you want to use the Oculus Rift.” By August 2020, Luckey and his co-founder were gone, and Facebook announced you would have to be logged into Facebook to use the Oculus headset. VR headsets, along with similar products from Vive and Sony, will sell about 6 million units in 2021. A real market, but not a category that’s registered broad consumer adoption. Some heavily hyped projects have flopped, such as the notorious Magic Leap, which has raised $3 billion in venture capital over 10 years while frantically pivoting from one vaporware announcement to the next. Or Google Glass, which launched in 2013 but was pulled two years later. To extend its run of success, Facebook must establish vertical distribution (i.e., hardware). As powerful as the platform is, the sixth-most-valuable company on Earth rests behind five others that all have more control over their distribution (i.e., iOS, Playstation, Android, Oil Wells, and Alexa). Facebook relies on other firms, including Apple and Google, for distribution. So the company is investing massively in hardware. With Oculus, Zuck sees a way to leapfrog mobile and laptops to connect people to Facebook in a more immersive and engaging way. The company unveiled an attempt to use VR to expand Facebook’s reach into the corporate world.

Facebook made to launch Horizon Workrooms, its VR-based challenge to Zoom, Slack, and the world of work as we know it. Facebook is pitching Workrooms not as a 3D version of Zoom, but as something called the “metaverse,” which is a future vision of the digital world beyond today’s internet, in which people socialize, work, and play across multiple domains, that is socially and economically integrated with the physical world – which Horizon Workrooms so far is not.

We should not expect a single, all-illuminating definition of the ‘Metaverse’. Especially not at a time in which the Metaverse has only just begun to emerge. Technologically driven transformation is too organic and unpredictable of a process. Furthermore, it’s this very messiness that enables and results in such large-scale disruption. There will be billions of dollars in value created by the creators of these spaces, and the infrastructure to support them, but an open world of interoperable identities and information is antithetical to Facebook’s project, which is to keep you on Facebook. The metaverse, as everyone but Zuck defines it, is decades away. The technical challenges alone are immense. Zuck’s plan is clear: He’ll build out a VR presence so Facebook looks like the metaverse, extend it into the corporate environment through Workrooms, brand the whole thing “metaverse”.

From an investor point of view, the rebrand can be positive. The reason it’s positive is it highlights the underlying value in the core business. Simple valuation numbers for Facebook, its market cap at the moment is about US$900 billion (after rebrand announcement), with US$60 billion of net cash. In terms of its core business, it’s only going to report a little bit less than US$50 billion. In spinning out Reality Labs as a separate segment, Facebook has revealed it is spending in excess of $10 billion per year on the metaverse project. With these figures, Facebook would only be trading on a P/E multiple of 13.5 times, which is very low for a company that has had the growth that Facebook has had. If you removed WhatsApp from the mix, which probably has more users globally than the core Facebook business, it would only be trading at a little over 10 times. So this split is really positive for investors as they can see the core profitability of the business. And valuation has become a very simple story now as a result of this disclosure. Facebook/Meta is betting on the uptake of virtual reality in more homes, and will be used for more than just gaming. The gaming opportunity with it is clearly larger on a long term view than what we’ve historically seen, but it is a broader opportunity to provide virtual experiences. The most obvious market and the one with the highest probability for success for virtual reality is the gaming market. Gaming revenue globally is probably close to US$150 billion, so taking a slice of that market is very attractive. Other immersive experiences could include attending a concert that you can’t attend, or catching up with your friends online and playing poker. Monetisation is unclear at the moment, but the idea that that would be attractive to a lot of people is very believable.

What is probably changing is the way investors should perceive Facebook/Meta. Not only as a social company but also as a wide range technology company that aims at helping people to connect and communicate. Having assumed that the future is to build platforms that develop the sense of presence, VR is to become an element of this. And that would be a great challenge for the company to continue growing the social experiences and building future platforms of virtual and augmented reality. But what is also interesting is the way these technologies will be implemented through the social apps. One can question whether the glasses are the best direction, but one thing in this context is sure. At some moment the developing technology has shown that possibilities offered by smartphones might be limited and if Meta is to concentrate on designing apps that help people interacting with each other then possibly the new technology shift is needed to make the continuous metaverse experience possible.

Future will show whether the vision of atomic unit of metaverse as a human being with his/her friends, personal avatar and digital clothes/tools is something users would adopt. Metaverse is currently at the initial stage, this technology will certainly evolve in many directions, mainly as a result of the experiences and expectations of users.

Rafal Ciepielski

Rafal Ciepielski

CEO RCieSolution

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The views expressed in this document do not constitute research, are not investment or commercial advice, and do not necessarily reflect the views of all management teams. They change over time.