Pretty much everything about Meta Platforms (META 2.10%) and CEO Mark Zuckerberg is divisive these days. So it comes as no surprise that the company's new premium virtual reality (VR) headset, Meta Quest Pro, was received with disdain by many in the media. Hating on VR, the metaverse, and the company's attempt to build a 3D app future is an easy way to get clicks -- especially from those who are unsure of what the metaverse even is in the first place.
But that's really a shame, because Zuckerberg isn't pursuing the metaverse just for kicks. Rather, Meta is building a new computing hardware platform to ensure the company's survival.
The problem with the software-based business model
Meta's social media empire makes money from ads, but at its core, these are still software businesses. Software is asset-light and highly profitable, but it isn't particularly sticky. Alphabet's Google Search is a notable exception, because cataloging the internet itself is an incredibly expensive task. Nevertheless, Google benefits from a special relationship with Apple through which the iPhone peddler accepts billions of dollars a year from Google to remain the default internet search browser on the iOS ecosystem.
Facebook and Instagram would probably love to have that type of ally, but they don't -- and they're paying for it dearly this year. Second quarter revenue fell 1% year-over-year to $28.8 million, and diluted earnings per share plunged to $2.46, down 32% from the year-ago period. Apple's tracking transparency changes, which forces iOS apps to ask users for permission before tracking their activity, are lowering ad value on Meta's social media apps.
And then there's TikTok, that new and shiny social media platform sopping up young consumers' time. TikTok embodies the challenge of software companies: They're easy to ditch for the latest trend. After all, the very thing that makes a software business appealing (low upfront costs, high profit) also attracts competition.
But there's a solid way to fight the fickle nature of software consumers: Add a layer of hardware to the mix.
Software and hardware is a much stickier duo than software and advertising. Think of Apple and Microsoft and the success each has had since the introduction of the personal computer. The downside to hardware is that sales are cyclical, with growth tied to new devices and features. Intermittent slumps can be brutal, marked by falling sales and periods of thin profit margins.
But if a company can pair sticky-but-cyclical hardware with good software, it has the foundation of a more durable business model that can last for many decades.
This is exactly what Meta is trying to accomplish with its metaverse bet.
Meta secures strategic partners
When unveiling the Quest Pro VR headset, Meta wasn't alone. Zuckerberg was joined by none other than Microsoft CEO Satya Nadella to announce that Microsoft Teams and Office 365 will be available on the Quest Pro. Aspects of the cloud computing service Microsoft Azure will also enable businesses to integrate device management and security with Quest Pro. And, the companies are looking to bring Xbox's cloud-based gaming service to the VR headset.
Oh, and there was another big cameo: Accenture (ACN -0.75%) CEO Julie Sweet. The IT consulting company is teaming up with Meta and Microsoft to further promote the benefits of VR in the workplace. Accenture said it has given 60,000 Quest 2 devices -- the predecessor to the newer Quest Pro -- to its own employees in the last year alone. As a sales and training specialist, Accenture could go a long way toward promoting and then selling VR headsets.
What do all of these partnerships mean? Meta isn't simply trying to build the metaverse. It's predicting that a new computing platform will take centerstage. PCs redefined technology in the 1980s, laptops did that again in the 1990s, smartphones went mainstream in the early aughts, and cloud computing turned access to software on its head in the 2010s. Zuckerberg believes that VR headsets, as the primary device used to interact with the metaverse, will be just as -- if not more -- transformative as other era-defining hardware.
Will VR take over the world? No. But could it augment how we work and play? Absolutely. Zuckerberg envisions a couple billion people using Meta's metaverse products in a decade, with each user spending an average of a couple hundred dollars a year. Other analysts predict the metaverse's total addressable market will be between $8 and $13 trillion by 2030, with an estimated 5 billion total users.
Meta is already running up against walls as an advertising-based software business. As the mixed-reality revolution unfolds, Meta needs a new outlet. Preferably, that outlet will be one in which it can exert some control -- without getting shut out by computing hardware competitors like apple.
What of those who say that Zuckerberg's bet on the metaverse and VR is money poorly spent? Time will tell. Bear in mind, though, that while $10.2 billion in operating losses last year on Reality Labs -- the segment that houses Quest Pro and other VR bets -- sounds like a massive number, Meta is not in trouble. Even in fiscal 2021, the company generated $46.6 billion in operating profit -- and that's after spending heavily on Reality Labs.
Zuckerberg and company want to build something new, sure. But as time drags on, Meta really needs its own computing device ecosystem to circumvent its reliance on Apple and other hardware companies. Investors may be getting impatient, but the message from the get-go was that the metaverse would take time to build. There is unlikely to be some singular lightning rod moment that flips Meta's VR from money-losing investment to highly profitable business segment. That's simply not how new technology works. Nevertheless, this is a necessary exercise for Meta. If that's not to your liking, this is probably not the stock you're looking for.
