Revenues for Meta’s Reality Labs division have plummeted $3.7 billion for the second quarter (Q2), the tech giant revealed in its financial reports on Wednesday.
For the tech enterprise, it cited numerous issues affecting its operations. These have included restructuring costs, facility consolidation, costs accrued from severance pay plans, and research and development (R&D).
In a statement, a Meta spokesperson said,
“We anticipate our full-year 2023 total expenses will be in the range of $88-91 billion, increased from our prior range of $86-90 billion due to legal-related expenses recorded in the second quarter of 2023. This outlook includes approximately $4 billion of restructuring costs related to facilities consolidation charges and severance and other personnel costs. We expect Reality Labs operating losses to increase year-over-year in 2023”
The statement also noted it expects losses to “increase meaningfully year-over-year due to ongoing product development efforts in augmented reality/virtual reality and investments to further scale our ecosystem.”
Meta Platforms’ Silver Lining
Despite Meta Reality Labs’ struggle for profitability due to R&D costs, it recorded an overall 11 percent jump in revenues from the same time last year.
Previously, the company faced immense setbacks after Apple changed its privacy policy, shuttering out Meta’s ad targeting facilities on iOS and Mac devices.
This led Meta in a downward spiral over a three-quarter period last year, forcing the Menlo Park-based firm to climb back up from major losses.
In its latest report, Meta indicated that it expected its third-quarter (Q3) revenues to reach $32 billion USD to $34 billion USD. It also surpassed its diluted earnings per share (EPS) by 21 percent from the previous year.
Meta’s stocks also spiked 159 percent ahead of Wednesday’s close, indicating renewed interest in the company compared to 2022’s heavy losses of nearly two-thirds in value.
Statements on Meta’s Q2 Earnings
In a statement, Mark Zuckerberg, CEO and Founder, Meta, said,
“We had a good quarter. We continue to see strong engagement across our apps and we have the most exciting roadmap I’ve seen in a while with Llama 2, Threads, Reels, new AI products in the pipeline, and the launch of Quest 3 this fall”
According to the company, it reduced its estimated earnings due to “cost savings, particularly on non-AI servers, as well as shifts in capital expenditures [capex] into 2024.” This resulted from “delays in projects and equipment deliveries rather than a reduction in overall investment plans.”
The news comes after Meta issued two of its three rounds of layoffs, shedding 11,000 and 10,000 employees in November last year and March this year, respectively. Meta increased its staff as the company scaled up its operations to accommodate its metaverse ambitions from 2021, ending in less-than-expected results.
The tech giant’s total staff remains at 71,469, a 14 percent drop from the previous year. It plans to increase its payroll expenses to boost its workforce with “higher-cost technical roles,” indicating a stronger push towards R&D expenses and manufacturing capacities.
The company concluded,
“We expect higher infrastructure-related costs next year. Given our increased capital investments in recent years, we expect depreciation expenses in 2024 to increase by a larger amount than in 2023. We also expect to incur higher operating costs from running a larger infrastructure footprint”
Analysis of Meta Q2 Revenues, Capex
Demond Cureton, Senior Journalist, XR Today, analysing Meta’s Q2 earnings and the company’s current direction.
Meta’s revenue jump indicates its efforts to remain resilient, balancing its budgets to accommodate its Family of Apps (FoA) and Reality Labs plans. However, a second round of doom-scroller headlines has come from mainstream media outlets.
This week’s Clickbait Award goes to KTLA News, which proclaimed the following,
“Yes, the metaverse seemed like a decent idea at one point, with applications in social interactions, business, entertainment and education. But the market’s wariness of the technology seems to have turned into outright rejection, leaving Meta to a large extent twisting in the virtual wind”
As argued before, whether from KTLA or others, conflating Mark Zuckerberg’s immersive empire with the Metaverse itself damages the publication’s reputation, slanders the efforts of thousands of XR firms worldwide, and reveals significant shortcomings in their knowledge or awareness of the rapidly-growing industrial metaverse.
Capex and the Push for Net Zero Emissions
Let’s take a look at a simple economics lesson. Due to capital-intensive R&D expenses, rising emerging tech firms require massive amounts of capex before reaching profitability. Many achieve initial R&D stages with help from angel investors or venture capital initiatives years before receiving a profit.
Some companies like Mojo Vision, an impressive augmented reality (AR) contact lens firm, ceased operations last year due to shortfalls in capital halfway into their product development cycle.
Imagine pouring investments into a technological venture such as the Metaverse, which is widely reported to materialise over the next ten or more years.
A critical issue with building the Metaverse, which many in the mainstream media have failed to address, is the elephant in the room: net zero emissions.
For example, to reach a specific goal such as net zero emissions, the International Energy Agency (IEA) recorded ballooning costs to specific enterprises from 2023 to 2030. The chart they have provided is per billion in USD.
For clean energy to reach net zero emissions, manufacturing technologies in the mining industry (blue) are projected to skyrocket from $21 billion USD to 80 billion USD.
This does not occur overnight but increases across a nearly 10-year period from 2021 to 2030. Industries have not even begun to face the expenses of net zero emissions protocols.
Imagine the company no longer producing energy, but spatial computing hardware, software, and solutions.
A Sustainable Metaverse?
Now, let’s see how that would affect a company as large as Meta. This is just one of many of Meta’s challenges.
It now needs to consider issues it never faced before: balancing profitability with R&D expenses, sustainable manufacturing and recycling, distribution, oscillating production scaling, supply chain scarcity, and market turmoil.
It will also launch the Meta Quest 3 ahead of the Connect 2023 event in September to compete with the Apple Vision Pro.
Sustainability has been one of the more challenging issues Meta has faced in its capex since 2017, as revealed in a recent report. As the company scales up its metaverse plans, it will undoubtedly face several sustainability issues: energy consumption, supply chains, employee health and wellness, renewables, and manufacturing, among others.
This is all whilst considering return on investment (ROI) for its existing products and leveraging its technological ecosystem to build metaverse standards across the industry.
Meta Comments on Sustainable Production
At The Economist’s Enterprise Metaverse Summit in late June, a member of the audience asked Kevin Chan,
Global Policy Campaign Strategies Director, Meta, about the company’s sustainability efforts.
Responding, Chan explained how the company aimed to reach net zero in 2023. This would include its hardware in “increasing numbers” and all its data centres, which involve artificial intelligence (AI) ambitions.
These data centres require “a lot of clean energy sources to power [them],” Chan explained.
Chan continued,
“No doubt as a sector, as [next-generational] computing increases, it’s going to require more energy. We definitely need to all think about doing our part to ensure that it is ultimately sustainable. Again, for our hardware, we are taking a very sustainable approach […] We actually issued a report, where you can see all of the different initiatives we’re engaged in and how we’re trying to become very sustainable in our efforts.”
Chan’s comments reference Meta’s 2023 Sustainability Report, highlighting the company’s efforts across renewable energy, water consumption, and manufacturing. Additionally, it has needed to consider its greenhouse emissions over a period of ten years — the same number of years it will take the Metaverse to materialise.
Meta explained in its report that it had reduced its operational emissions by 94 percent “from a 2017 baseline” by supporting its data centres and offices with “100 [percent] renewable energy.”
It also noted it lowered its greenhouse gas (GHG) emissions by over 12.3 million metric tonnes of carbon dioxide equivalents (CO2e) since 2018.
Meta outlined that its “responsibility to decarbonize our footprint extends beyond our data centers and offices.”
Aligning with the United Nations’ Paris Agreement, Meta will target net zero emissions across its value chain by 2030 and has “maintained net zero emissions in our global operations” since 2020.
Meta concluded,
“We know that achieving net zero value chain emissions in 2030 is going to be very difficult, and this challenge requires material shifts in how we build infrastructure and operate our business. Our approach to reaching our goal will evolve over time as we transform our business and explore climate solutions that will scale with varying degrees of success”
This is only one of the capital expenses Meta has to consider, not just for its metaverse plans but also for its FoA. Meta cannot scale up its efforts without the new data centres and its upcoming ResearchSuperCluster (RSC) centre.
What is Green Capex?
Goldman Sachs, one of the world’s largest banking institutions, outlined this challenge in its Green Capex report.
It explained,
“The need for Green Capex is immense – approximately $6 trillion annually this decade, up from $3.2 trillion per year in 2016-20 according to Goldman Sachs Research. As more countries pledge to achieve net zero, largely by 2040-2050, we expect governments will provide infrastructure, water and clean energy stimulus via tax breaks, grants and direct investments”
Notwithstanding its R&D efforts for the Metaverse, Meta will incur significant green capex as an enterprise. This excludes expenses for user experience (UX) improvements, competition with rival firms, and ad revenues.
As others scale up their metaverse efforts, companies like Apple, HTC VIVE, and Pico will also face similar headwinds, depending on their level of preparedness.
This is especially true as the extended reality market increases from $35.14 billion USD last year to $345 billion in 2030, according to Precedence Research. Businesses must start now with their green capex plans or face potentially catastrophic consequences over the next decade as resources become more limited.
Conclusions
Now that the Apple Vision Pro has unveiled in June this year, the industry expects a real battle royale between Meta and Apple. These companies have been at odds with each other since the contentious privacy policy change from the latter, and Zuckerberg and Co are not likely to back down from the fight.
For Reality Labs to succeed, it has to think like a leader. In the world of the Metaverse, leaders think long-term and consider multiple strategies to weather the storm. Conversely, followers think in the short term.
As an industry analysing the Metaverse, and XR in general, we also must consider how to define losses and gains, learning from the former and celebrating the latter.
For example, I was specifically critical of Apple’s Vision Pro for two reasons: it’s $3,500 price tag and its proprietary hardware and software ecosystem, exported from its iPhone and MacBook ethos.
However, even I made it clear that this was a fantastic opportunity to explore the future of spatial computing, and the headset was a phenomenal first attempt at device development.
That is what I admire about the tech industry. Moving towards progress can seem like Sisyphus perpetually buckling under the weight of insurmountable pressure. However, unlike our mythological figure, we are progressing and cannot forget that long term.
To make the Metaverse a success, there is no room for willful ignorance, short-sightedness, or instant gratification. Certainly, there is room for error, but companies must consider what lessons they will learn and how much it will cost them for their expenses and with their workforces.
For the media that chooses to think in the short term, ten years from now, you will no longer be sharing your thoughts about the Metaverse. You will be sharing your thoughts in the Metaverse.
Concluding, Albert Camus sums up the XR industry’s struggle for the Metaverse,
“The struggle itself towards the heights is enough to fill a man’s heart. One must imagine Sisyphus happy”
The views in this analysis piece are solely those of the author and do not reflect the XR Today brand, its partners, or affiliates.
