Meta: investment in AI, not metaverse, gets thumbs up

Meta’s virtual reality business, Reality Labs, is spending money like a start-up. Unfortunately, it lacks the 10x growth to match. The company’s R&D spend in the first three months of the year exceeded $9bn, equal to 33 per cent revenues. That’s twice as high as Alphabet and Microsoft.

The tech sell-off last year has prompted sector-wide cost cutting, including record job losses. Meta is engaged in what it calls a year of efficiency. Still, the numbers coming out of Reality Labs are ugly. The unit reported an operating loss of almost $4bn for the quarter. That would be more palatable if losses were driving consumer demand. But sales are down 51 per cent on last year. Demand for the latest Quest 2 VR headset is limited. New mixed-reality headsets due out this year might be more popular. But for now, the idea of the metaverse as integral to our social and work lives is a bust.

It is noticeable that questions on Meta’s earnings call ignored the metaverse and focused on AI. Here Meta’s investment may pay off earlier. Its AI tools for advertisers and users could improve targeted digital advertising.

Like Alphabet, Meta is doing an OK job persuading advertisers to spend as much as they did last year, despite a wobbly economic backdrop and privacy changes from Apple that limit ad tracking. Still, competition from TikTok and new ad businesses at companies such as Apple and Amazon are chipping away at Meta’s share of the global digital advertising market. According to Insider Intelligence, this is at the lowest point since 2018.

AI might improve that. Like Alphabet, Meta is reliant on digital advertising. Like Alphabet, it is spending heavily on new tech that it hopes will both boost its existing business and create new lines of revenue. Unlike Alphabet, it lacks a profitable alternative business unit like Cloud.

There are suggestions that charging users to verify their Facebook and Instagram accounts could add an easy source of funds while Meta waits for its AI and metaverse investments to pay off. But Twitter’s disastrous experiment with subscriptions is off-putting. Convincing investors that AI can lift the core digital ads business in the near term is far more compelling.