In October 2021, Mark Zuckerberg announced his social media company, Facebook, would be renamed to Meta Platforms (META 0.16%). It's fair to say the organization had outgrown its original name since it previously acquired a series of other platforms like Instagram and WhatsApp, but that wasn't Zuckerberg's motivation.
He had been formulating his vision for a virtual world known as the metaverse since at least 2014, when his company acquired virtual reality headset maker Oculus. But when the COVID-19 pandemic struck in 2020, the work-from-home trend that followed sparked a huge amount of interest in the metaverse.
It created a perfect storm for virtual reality-based technologies, thus, they were placed at the center of Meta Platforms' strategy for the future. But to date, there hasn't been a great deal of interest in life inside the metaverse.
Here's what Mark Zuckerberg got wrong
Technology leaders had marketed the metaverse as the future of the internet. It was billed to reshape social and professional connections by giving users life-like digital avatars, and allowing them to feel a sense of presence when connecting with each other even from opposite sides of the world.
The metaverse was also going to be interoperable; in other words, no single company would "own" it. It would be a collection of virtual worlds created by different developers which would come together to form one enormous digital universe.
But as it turns out, fully immersive virtual experiences are a big leap from the screen-based digital experiences consumers know and love today. The ability to put your smartphone down to do other things is lost with a virtual reality headset, because it occupies nearly all of the user's senses.
As early as June last year, Mark Zuckerberg said he still envisioned 1 billion people eventually crawling Meta's virtual world. Considering the company serves 3.8 billion users each month across Facebook, Instagram, and WhatsApp, it's not inconceivable that a portion of them will migrate to the metaverse. But so far, Meta's early iteration of the concept called Horizon Worlds had only attracted 200,000 monthly users toward the end of 2022. That was well below the 500,000 it projected.
According to a recent survey of a sample of the U.S. population, just 48% of people engage with a metaverse in some capacity. Of those who do, 84% said they only use it for fun, and more than half of them spend less than five hours inside virtual worlds per month.
Investors haven't been impressed, either
Meta has been developing the hardware and the software for the metaverse under a specific division in the company called Reality Labs. Since 2019 -- which is as far back as Meta discloses financials for the segment -- Reality Labs has generated a whopping $39 billion in operating losses.
It has just $6.4 billion in revenue to show for that expenditure over the same period.
Naturally, this has frustrated investors because the losses have impacted Meta's overall profitability. And the broader economy began to sputter in 2022 so businesses were spending less money advertising on platforms like Facebook and Instagram. That led to a decline in Meta's revenue which was a further drag on its earnings power.
In the back half of the year, Zuckerberg finally acknowledged investors' concerns and committed to cutting costs. He has since laid off 21,000 employees across the company, and Reality Labs' operating loss shrank in the first quarter of 2023 on a sequential basis.
Meta isn't the only company paring back its commitment to virtual reality. Microsoft (MSFT 0.59%) shut down its metaverse division in March, laying off 100 staff. Media giant Disney (DIS -0.01%) also killed its metaverse segment earlier this year, though it said it still sees a future in virtual reality. It's unclear when that future will arrive, though.
Here's where Meta is going now
Meta's future might hinge on two words: Artificial intelligence (AI). Earlier this year, Zuckerberg said advancing AI and building it into all of Meta's social media platforms is the company's single largest investment.
See, social networks like Instagram have been dominated by the new entertainment-focused TikTok, which uses short-form video as a content format and relies on artificial intelligence to curate its user feed. In other words, AI learns what each user likes and then dictates what videos they see, which leads to more engagement.
To combat this threat, Meta launched a new feature called Reels in 2020 which is now active on both Instagram and Facebook. The company has consistently improved its AI recommendation engine and in Q1, it said the time users were spending on Instagram jumped 24% year over year as a result.
Additionally, AI has significantly increased the monetization efficiency of Reels by 30% on Instagram and 40% on Facebook, likely because AI can more accurately determine which ads will resonate best with particular users.
Not only did AI lead to Meta's first quarter of revenue growth in a year in Q1, but it has helped drive its stock price up by a whopping 87% in 2023 so far (though it remains 38% below its all-time high). The company has labeled 2023 its year of efficiency, and although it said it intends to continue investing in the metaverse, investors can likely rest easy knowing Reality Labs' losses won't worsen by much in the near future.
