This article first appeared in The Edge Malaysia Weekly on October 31, 2022 - November 6, 2022

JUST 14 months ago, Meta Platforms Inc, the social media giant formerly known as Facebook, which owns Instagram as well as messaging app WhatsApp, was flying high. Its stock touched US$383 and the company was valued at nearly US$1.1 trillion. CEO Mark Zuckerberg, who had founded Facebook from his Harvard University dorm room at the age of 19, had turned an idea into the world’s sixth-largest listed company. Zuckerberg’s own net worth had soared to US$145 billion, making him the third-richest man on earth.

Three weeks after it shares peaked, however, Facebook reported that its growth was screeching to a halt as Chinese short-form video app TikTok siphoned away huge chunks of its younger users and Apple Inc’s App Tracking Transparency policy made it difficult for the firm’s three platforms to surreptitiously suck in more data from users without their permission and then deliver precisely targeted ads. Instead of laying out a proper plan to grow Facebook and better monetise its platforms, Zuckerberg announced he was pivoting to the metaverse and renaming the firm Meta Platforms.

One year on, Meta faces an existential crisis. Revenues and earnings are plummeting, TikTok is taking away more of its users and advertisers, Apple is doubling down on its privacy crackdown and the social media platform continues to struggle with a weak advertising market amid an economic slowdown. On Oct 27, Meta reported results for the quarter ended September. Revenues were down 4% year on year on falling ad pricing. Its expenses were up 19%, while operating margins were down from 36% a year ago to 20% in the last quarter as net income fell 52%. That was not all. It guided that earnings in the next quarter were going to be much lower than the recently downward-revised forecasts.

Investors hammered Meta shares, which plunged 20% in the hours after the earnings were announced. Meta shares are now down 73% from last year’s peak. The stock is where it was in early 2016. Meta is bloated, overstaffed and still spending money as if it was being dropped from a helicopter. The social media giant plans to spend US$34 billion (RM160.2 billion) to US$39 billion next year on data centres, servers, infrastructure and an increase in artificial intelligence capacity, from around US$32 billion this year.

On Oct 25, in an open letter to Zuckerberg, Brad Gerstner, founder and CEO of Altimeter Capital, said Meta had “drifted into the land of excess — too many people, too many ideas, too little urgency”. That “lack of focus and fitness is obscured when growth is easy but deadly when growth slows and technology changes”, said Gerstner, whose firm helped list Singapore-based ride-hailing firm Grab Holdings Inc last year through a merger with his blank-cheque SPAC, or special-purpose acquisition company.

As Meta ramped up spending, he pointed out, it lost the confidence of investors. “The conventional wisdom is that the core business hit a wall last fall. As a result, the team hastily pivoted toward the metaverse.  “People are confused by what the metaverse even means,” Gerstner said.

He argued that “Meta needs to get its mojo back, rebuild confidence with investors, employees and the tech community to attract, inspire and retain the best people in the world”. To accomplish that goal, he recommended a three-step plan that would double the firm’s free cash flow to US$40 billion a year and help it get fit and focused. He urged Zuckerberg to reduce Meta’s bloated headcount expense by at least 20%. Over the past four years, Meta’s headcount has increased from 25,000 to 85,000 employees. Gerstner also urged the Facebook founder to reduce his firm’s annual capital expenditure, or capex, by at least US$5 billion from US$30 billion, to US$25 billion. Excluding its metaverse investment, Meta has gone from US$15 billion in annual capex in 2020, to US$30 billion in 2022. It is investing more in capex than Apple, Tesla, Twitter, Snap and Uber combined. Gerstner also urged Meta to limit its investments in the metaverse, through Reality Labs, to no more than US$5 billion per year. (This year, Meta is set to invest US$15 billion in the metaverse.)

Zuckerberg only just launched Meta Quest Pro, a US$1,500 headset, on Oct 25. Horizon Worlds, Meta’s social universe set in virtual reality, is struggling to gain and keep users. The Wall Street Journal reported recently that Horizon had just 200,000 monthly active users, a third less than the 300,000 Meta mentioned earlier this year. Compare this with the three million monthly active users for Facebook, or 1.1 billion people who own an Apple iPhone.

While Meta has put most of its chips on virtual reality, Microsoft has HoloLens, the augmented reality/mixed reality headset. Apple, too, is making similar bets on mixed reality as well as augmented reality. The iPhone maker is set to release its mixed reality headset in the first half of next year and its augmented reality gear in 2024. For both Microsoft and Apple, mixed reality and augmented reality are small side bets. Even if their augmented reality and mixed reality wagers fail, they will be seen as a nice tax write-off. If they succeed, they will be seen as a pleasant bonus.

For his part, Zuckerberg has bet the ranch on his audacious metaverse vision. Let’s do the simple math here: US$10 billion a year over 10 years works out to US$100 billion in total investments. Seriously, just think about it. The metaverse would need to generate a lot of revenue for such a humongous investment to be worthwhile.

Over the past 32 years, if you had invested in the Standard & Poor’s 500 index, the main US equities barometer, you would have obtained more than 10% in annualised returns, plus a dividend of 2% on average. That’s a 12% annual return overall. Even if you back test the S&P 500 returns all the way to January 1960, you will get a similar 11.5% annualised return over 62 years. Some years, the returns have been lower or, indeed, negative, while in other years, they have been far higher. Last year, the S&P 500 had total returns (including dividends) of 28.7%.

If Meta invests US$10 billion a year for 10 years, with a 12% annual rate of return, its investments in the S&P 500 index exchange-traded fund would be worth US$196.5 billion in 10 years, according to back-of-the-envelope calculations, as long as the returns over the next decade are more or less in line with the 62-year historical average. I will readily concede that this is all easier said than done and a six-decade historical average will not necessarily translate into similar returns over the next 10 years. But if I were in Zuckerberg’s shoes, I would ask myself: Is throwing so much money on an unproven technology really worth it?

Clearly, the metaverse is not like curing cancer. If Zuckerberg had somehow stumbled upon a magic cancer cure, I would wholeheartedly support throwing US$100 billion into the effort. But dumping that kind of money on funky virtual reality glasses and the metaverse? Mr Zuckerberg, you have got to be kidding.

In 10 years, there will be a ton of other shiny new technologies using artificial intelligence, quantum computing and sophisticated algorithms that threaten to leave a dated technology like the metaverse in the dust. Of course, Zuckerberg and others might argue that Meta will double down on all the new, emerging bleeding-edge technologies and deliver an even better metaverse. Really? Like he doubled down to fight off Snapchat by blatantly copying all its features, or like he has tried repeatedly to outsmart TikTok with Instagram Reels?

The reality is that bloated incumbents always have a tough time trying to catch up with nimble, hungry challengers. Nobody knows that more than Zuckerberg himself; he was a challenger himself once. And when he got the currency in Facebook’s bloated stock, he bought Instagram and later WhatsApp, stifling competition, while regulators were asleep at the wheel.

Meta’s biggest problem is governance.  Founder, CEO and chairman Zuckerberg owns just 13.6% of the listed company’s shares but, owing to its unique share structure, which gives Class B shareholders like him 10 votes per share, he owns 58% of the voting rights. That, in turn, accords him a veto over almost everything. He is answerable to no one. He cannot be removed as CEO and chairman, or even as a director of the company. Meta’s board, which is stuffed with mostly his cronies, cannot steer him towards anything he does not want to do. When it was first mooted four years ago that the company should look at separating the roles of chairman and CEO, Zuckerberg reportedly had a one-word answer: No.

How far and how fast has the once-mighty social media platform fallen? Meta has lost US$800 billion in market value since the stock peaked in September last year. Wall Street, which backed boy wonder Zuckerberg 10 years ago with the Facebook initial public offering, is fast losing its patience with Meta. “How investors are feeling right now is that there are just too many experimental bets versus proven bets,” Brent Thill, internet and software analyst for Jefferies & Co, told Zuckerberg on Meta’s quarterly earnings call on Oct 27.

In a report later that evening, the analyst said investors will question Meta’s guidance of 15% expense growth and 13% capex growth into a slowing digital ad market. “Our concern is the payback period for Meta’s US$130 billion in capex and operating expenditure in 2023 could take years to improve its revenue growth trajectory,” Thill noted.

“What are the payback periods for these mega investments? In a more favourable environment, we would be more receptive to Meta’s investment. However, in the current backdrop, we believe a more prudent approach would have been welcome.”

What’s next for Meta? Gerstner notes that Meta’s core business is one of the largest and most profitable in the world, with over US$45 billion in operating profits last year. Moreover, the company has capabilities in key future technologies like artificial intelligence and immersive 3D that can help drive new products and future growth. If it can conserve resources, improve its free cash flow by cutting capex, as  well as bloated expenses and staff, it will also have adequate financial resources to invest and grow its business.

Business turnaround stories of faltering giants are the stuff of legend. Software giant Microsoft Corp foundered in the aftermath of the tech bubble burst but eventually made a sharp pivot, betting big on its move to the cloud. Google’s owner Alphabet Inc, which has its own set of issues, is slowly pivoting as well. Apple was just weeks away from bankruptcy when its founder Steve Jobs returned, and pivoted to other consumer devices such as iPods, iPhones and iPads. Businesses falter, remake themselves and re-emerge to become dominant players again.

For now, Meta employees are not sold on its grand metaverse vision. Staff morale is low. When employees start to question your business model, the company has a serious problem. For years, tech founders like Zuckerberg ignored Wall Street as their firms were growing at breakneck pace and investors were happy to ride on the growth. Now, as  Meta shares are being hammered, Zuckerberg needs to pay attention to investors if he wants to keep luring the brightest talent with stock options and make Meta a trillion-dollar tech giant again.

Assif Shameen is a technology writer based in North America

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