Investors ignore the material reality of Meta

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Investors ignore the material reality of Meta
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Previous forays of software signatures into hardware bode ill for the metaverse hulk

Mark Zuckerberg’s idea to transform the company formerly known as Facebook into a metaverse powerhouse has a major flaw. To get the most out of their new virtual world, users will first need to purchase a piece of hardware. History shows that companies that switch from selling products that customers can’t touch to ones that can tend to run into problems. But the stock’s 20% rise after Wednesday’s results shows that shareholders are too enthusiastic about short-term tinkering.

Meta Platforms said it plans to cut spending in 2023 and increase buybacks. It’s the least it could do after costs rose nearly a quarter in 2022 while revenue fell for the first time. Investors should focus on Zuckerberg’s plans to use the metaverse to reverse that trajectory.

Meta has the wherewithal to produce the headsets needed to access the best parts of the metaverse, thanks to its 2014 purchase of Oculus. To succeed, however, Zuckerberg needs scale, which means strengthening supply chains and, what more importantly, price the product so that consumers can afford it. All this suggests that margins will be thin, which in turn dilutes a great asset of Meta: an advertising algorithm that is a money machine.

Microsoft’s purchase of Nokia is a clear example of what can go wrong when software firms set their sights on hardware. That agreement was intended to recover part of the value that software had created over decades for an entire hardware ecosystem by entering the phone business. But within a few years, Microsoft dismantled it and took a $7.6 billion loss when it became clear that Apple was simply better.

Other tech companies have tried a similar turn without success. Google launched smart glasses, an experiment that went from great promise to sidelined project in just a couple of years. Amazon is cutting jobs in its Alexa division after the eavesdropping speaker system became little more than a novelty.

Meta’s success would pair a video game platform and an advertising company, cracking the code that Sony, Nintendo and others are chasing, and creating a lucrative package that is hard to break. But past examples suggest it’s a long shot. Admitting this may mean that shareholders of other companies, rather than those of Meta, benefit from the services that Facebook already provides. But that’s probably better than destroying the value Zuckerberg has already created.

Competence

Meta may be into virtual worlds, but it’s not very interested in the problems of virtual competition. The group may have just handed the US Federal Trade Commission (FTC) its first major defeat in a merger case brought by hawkish Lina Kahn. A district judge has denied the agency’s requested injunction to block the company’s acquisition of fitness app developer Within. Although the case is not necessarily closed, it would be a setback in the attempt to prevent another Instagram from slipping through.

Facebook’s 2012 deal for the then-fledgling apps for photo-sharing easily passed regulatory approval to become the cornerstone of the company’s social media domain. The regret in Washington helped inspire a new wave of thinking, in part to anticipate the potentially dangerous market impact of otherwise small transactions.

Courts have been less persuaded to obsess over tomorrow rather than today. In 2015, the FTC lost a case against the joint medical companies Steris and Synergy. The same thing happened in September with the Illumina operation by Grail (biotech). The lawsuit against Within was again based on these arguments: concerns about possible future dominance in a virtual reality market still in its infancy.

The determination to find and stop the next Instagram-like deal continues to shape law enforcement, including a complaint filed in December against Microsoft’s agreed $69 billion acquisition of Activision Blizzard. Although the FTC’s argument cuts across the current video game market, Microsoft has offered concessions, such as making titles available to rivals, that could be enough to convince a judge. In the Illumina ruling, much emphasis was placed on these types of concessions. Healthcare titan UnitedHealth also offered them to secure a court victory in its $8 billion settlement with Change Healthcare.

The legal background leaves arguments about what will happen when the games go from consoles to streaming. The FTC has a week to appeal Within’s ruling, according to Bloomberg, and is also conducting a parallel process in an internal agency court. But if he loses, it could mean that, when it comes to competition between companies, the future is now.

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Brian Adam
Professional Blogger, V logger, traveler and explorer of new horizons.