Meta's Metaverse Mess – The Journal. – WSJ Podcasts – The Wall Street Journal

About a year after Mark Zuckerberg rebranded Facebook as Meta Platforms Inc., internal documents show the company’s transition to the metaverse is not going smoothly. WSJ’s Salvador Rodriguez explains how glitchy technology and declining monthly users are complicating Meta’s big metaverse push.

Further Reading:
–Company Documents Show Meta’s Flagship Metaverse Falling Short 
–Facebook Parent Meta’s Earnings Fall Short as Revenue Decline Accelerates

Further Listening:
–How to Build a Metaverse 
This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.
Ryan Knutson: Meta has had a rough week. The company formerly known as Facebook released its quarterly financial results last Wednesday, and our colleague Salvador Rodriguez says it wasn't pretty.
Salvador Rodriguez: The numbers during the earnings call were not good. It was only the second time in the company's history that revenue has declined.
Speaker 3: Meta coming off its worst week in history.
Speaker 4: Out came to the quarterly results and they were disappointing.
Speaker 5: Again, I told you about Meta. It's a meta mess.
Ryan Knutson: After the numbers came out, Meta's stock plummeted. It's now down 70% from where it was a year ago, meaning the tech giant that was once worth over a trillion dollars is now worth less than 250 billion. One reason for the lackluster results is Meta's big bet on the metaverse, the virtual reality world that the company sees as its future. Meta has invested billions of dollars on VR headsets and a virtual platform called Horizon Worlds, but so far it hasn't seen much success.
Salvador Rodriguez: If I had to sum it up, I would say it hasn't been a hit. It's just full of bugs. People haven't stuck around for it. And the people who try it, they have issues.
Ryan Knutson: Welcome to The Journal, our show about money, business and power. I'm Ryan Knutson. It's Tuesday, November 1st. Coming up on the show, why Meta's metaverse is falling short. Meta started working on VR headsets almost a decade ago and has been selling them for a while. Then, last December, Meta launched Horizon Worlds.
Speaker 6: Welcome to a place of limitless possibilities. A place where you can invent things. Transform things. Create entire worlds.
Salvador Rodriguez: Horizon Worlds is Meta's flagship metaverse. If their main app for the real world is Facebook or Instagram, Horizon is the main app for what's coming next.
Ryan Knutson: And it peaked a lot of people's interest.
Salvador Rodriguez: Externally, there was a lot of wonder and curiosity. And, in many ways, calling this the metaverse is just a rebranding of virtual reality. It's kind of like when you take something that maybe has died out a little bit and you just slap a new name on it and maybe it gets the juices flowing again. And it really worked. I mean, a lot of people gave VR another chance. Like, okay, if it's time to try it again, let's try it again.
Ryan Knutson: Recently Sal and his colleagues saw internal company documents that shed light on how Meta's metaverse push is going. The documents show that the initial response wasn't too bad. Horizon Worlds drew in about 300000 monthly active users early on.
Salvador Rodriguez: The problem is that, although the public held up its end of the bargain and gave it a chance, a lot of the products and primarily Horizon Worlds are buggy and people have not stuck around for them. In our reporting, what we found is that since then they've lost more than 100000 monthly active users. And that's just shocking. I mean, you never want to be losing users, but this is supposed to be Meta's future bet. This is supposed to be the next thing. This should be growing. The number of monthly users that are in Horizon right now is less than 200000.
Ryan Knutson: For comparison, Meta's other products, Facebook, Instagram, and WhatsApp, combined have more than 3.5 billion average monthly users. Sal and his colleagues wanted to understand why so many users were ditching Horizon Worlds. So they dawned Meta's nearly $400 VR headsets and decided to go see it for themselves.
Salvador Rodriguez: When I first arrived, it was like Neo entering the Matrix with Morpheus for the first time. It was just an empty virtual space of nothingness. But instead of white nothingness, it was light blue nothingness and I was very confused as to what I was supposed to do. Part of the confusion is because it didn't boot up correctly the first time. It literally had an error the first time I tried to use it. Eventually, I just came to my senses and I was like, okay, this is not operating correctly.
Ryan Knutson: He restarted the headset and eventually got the app to start working.
Salvador Rodriguez: This time, there was a menu where I could get a better sense of what I can do within Horizon. And so what I did is I chose one of the first virtual worlds that was offered up. I believe the one that I chose was called Party House. I went in there and it was a party house, but it was emphasis on the house and not so much on the party because there was only one person there.
Ryan Knutson: Only one person at the house party.
Salvador Rodriguez: Yeah, there was only one person there, but it was a nicely built world.
Ryan Knutson: Meta's internal documents show that executives working on metaverse projects are acutely aware of the sluggish user growth. In one document, an executive said, "An empty world is a sad world." One of the people trying to drum up interest in Horizon Worlds is Hardy West. He's a developer who's built a bunch of different virtual worlds like nightclubs and theme parks.
Speaker 7: Oh, man. Y'all already know. It's Thursday. It's 9:50 right now. We've already got four people in the world. You know we got a limit, so get over here right now.
Ryan Knutson: Sal went to meet Hardy inside the Horizon World's app, but during his visit, he ran into more glitches. His mic wasn't working. And then the whole thing crashed.
Speaker 7: Sal, you still there?
Salvador Rodriguez: Horizon crashed.
Speaker 7: Oh, wow. Oh, wow.
Salvador Rodriguez: Yeah, no, it crashed in the middle. Do you know if the Quest has a factory reset?
Ryan Knutson: On top of that, the VR headset itself started making Sal nauseous and he had to end the call.
Salvador Rodriguez: It's not comfortable to wear for extended periods of time. And if you're not comfortable, it literally limits how long you can go. Nausea is a real thing. I really thought that I was going to throw up or possibly faint. So I was like, "I just need to end this call, unfortunately. I've hit my limit."
Ryan Knutson: One of the reasons people might be getting nauseous is because the avatars don't mimic real life. Not only do they not have legs, but the arms act kind of funny too. Sal noticed this when he was talking to Hardy.
Salvador Rodriguez: His arms are doing weird things because there are the controllers that track your hands, but there's nothing tracking your elbows or your forearms or your biceps. Even the arms are doing kind of weird things, which it's not unsettling, but it looks weird. It's some hand movements that you would never do in real life.
Ryan Knutson: Nausea, expensive headsets, glitches have all had an impact on Horizon World's user growth. To deal with persistent bugs and user complaints, the documents show that Meta put Horizon on lockdown last month, meaning it's paused the launch of new features until it improves the current user experience. A Meta spokesman said the metaverse efforts were always intended to be a multi-year project and the company continues to believe it's the future of computing. Meanwhile, the documents show the company is lowering its goals.
Salvador Rodriguez: They were trying to get to 500000 monthly active users by the end of the year. They were so off the mark that, in recent weeks, they went ahead and revised that goal and they brought it down to 280000. They're still more than 100000 monthly active users from reaching the revised goal. And I don't really see what could change that could all of a sudden get them to reaching that goal.
Ryan Knutson: One of the documents suggests that Meta employees weren't even going into Horizon Worlds much themselves.
Salvador Rodriguez: There was another document in which one of the execs at the company tells his employees that, "Hey, we ourselves are not using Horizon enough. How can we expect others to use this and love this if we don't?"
Ryan Knutson: The stakes for the CEO of Meta, Mark Zuckerberg, are high. The big rebrand and the pivot to the metaverse have taken a lot of the company's resources.
Salvador Rodriguez: We already know that it's at least $10 billion, but that's really looking at this past year alone. Zuckerberg has complete control of Meta. He is down to take the time and spend the money necessary to get this right, but the problem is that, the public and his investors, they might not have the same patience.
Ryan Knutson: That's after the break. One of the reasons Meta stock crashed so hard after its earnings report last week is because of what investors saw in the company's Reality Labs division. That's the division that houses its VR headset and the Horizon Worlds app.
Salvador Rodriguez: Revenue for Reality Labs was down nearly 49% compared to a year ago. I mean, that is huge. And that is pretty… I think if you're an investor or if you're an employee, that's got to be depressing to see. Because if this is the future, why is it already in decline? Not only that. They also reported that the unit had an operating loss of $3.7 billion.
Ryan Knutson: Meaning they're spending $3.7 billion more than they're bringing in.
Salvador Rodriguez: Yeah, they're burning cash like crazy. The cherry on top is that the company said they expect that figure will grow significantly in 2023.
Ryan Knutson: Well, why?
Salvador Rodriguez: These headsets are really expensive to make. In late July, they actually raised the price by a hundred dollars. I guess they just did the math and figured we have to at least raise it a hundred dollars. And the public did not like it.
Ryan Knutson: There are other reasons why the overall business is struggling. For instance, Apple introduced changes to advertising last year that interfered with how Meta can target its users. Meta is also facing stiff competition from apps like TikTok. And of course, there's the fact that the tech sector as a whole has been suffering from recession fears among other things. How did investors react to Meta's earnings?
Salvador Rodriguez: It was bad. I mean, in after hours trading on Wednesday, the stock was down, at some points, more than 19%. So the share price lost about a fifth of its value in a matter of hours. The market cap of the company, meaning how much Meta is worth, fell below $300 billion. They were worth more than a trillion dollars. Their peak was September 2021. So they've lost approximately $750 billion in market cap.
Ryan Knutson: Their earnings were so bad, they shook CNBC host Jim Cramer, who's been telling his viewers over the past year that Meta was a good investment.
Speaker 8: Let me say this. I made a mistake here. I was wrong. I trusted this management team that was ill advised. The hubris here is extraordinary. And I apologize.
Salvador Rodriguez: I mean, Cramer was like… It looked like he was on the verge of tears because he really believed in Meta.
Ryan Knutson: Zuckerberg addressed investor concerns on the company's earnings call last week.
Salvador Rodriguez: He said, "I get that a lot of people might-"
Speaker 9: … disagree with this investment, but from what I can tell, I think that this is going to be a very important thing and I think it would be a mistake for us to not focus on any of these areas, which I think are going to be fundamentally important to the future. So we're going to try to do this in a way that is responsible and matches the way that the rest of the business is growing over time.
Salvador Rodriguez: He also at one point said that we're going to look back on this decades from now and acknowledge that it was the right bet. So he very much… I mean, he pretty much has tied his entire legacy to the metaverse working out.
Ryan Knutson: Meanwhile, Meta is pushing forward with the metaverse. It says it plans to launch a web version of Horizon Worlds and that avatars there will soon be getting legs. The company also recently launched a high end version of its VR headset that costs $1500.
Salvador Rodriguez: Their goal with this new Pro headset is they want to compete for the 200 million people who buy new computers every year. That's a really ambitious target, but that is now where they're looking.
Ryan Knutson: So instead of buying a laptop, you should buy one of Meta's virtual reality headsets?
Salvador Rodriguez: That's what they would love for you to do.
Ryan Knutson: It seems like, for Mark Zuckerberg and for Meta, this is a very pivotal moment in the company's history.
Salvador Rodriguez: It truly is. I think that this is the biggest challenge that they've ever faced. And there are no signs that things are getting better. It's not just one problem. It's a perfect storm of challenges. But Mark has majority voting powers, so what he says goes. Ultimately, no one has more money on the line than he does. But this has become quite the challenge. I really felt it as he got to the end of his earnings call because there was an element of bargaining to his words. At one point, he straight up said, "I appreciate the patience and I think those who are patient and invest with us are going to be rewarded." If you bought in January and you're still patient now, you've lost 70% of what you put in. You could say it's an existential time for the company, but we'll see what happens. We'll see what Mark can pull off.
Ryan Knutson: That's all for today, Tuesday, November 1st. The Journal is a co-production of Gimlet and The Wall Street Journal. Additional reporting in this episode by Jeff Horowitz and Megan Babrowski. Thanks for listening. See you tomorrow.
Kate Linebaugh is the co-host of The Journal. She has worked at The Wall Street Journal for 15 years, most recently as the deputy U.S. news coverage chief. Kate started at the Journal in Hong Kong, stopping in Detroit and coming to New York in 2011. As a reporter, she covered everything from post-9/11 Afghanistan to the 2004 Asian tsunami, from Toyota’s sudden acceleration recall to General Electric. She holds a bachelor degree from the University of Michigan in Ann Arbor and went back to campus in 2007 for a Knight-Wallace fellowship.
Ryan Knutson is the co-host of The Journal. Previously, he spent more than four years in the newsroom covering the wireless industry, and was responsible for a string of scoops including Verizon’s $130 billion buyout of Vodafone’s stake in their joint venture, Sprint and T-Mobile’s never ending courtship and a hack of the 911 emergency system that spread virally on Twitter. He was also a regular author of A-heds, including one about millennials discovering TV antennas. Previously, he reported for ProPublica, PBS Frontline and OPB, the NPR affiliate station in Portland, Ore. He grew up in Beaverton, Ore. and graduated from the University of Oregon.

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