Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company

While the shares of all tech companies have been hammered lately, the underlying profit machines for

Apple,

Microsoft,

Google and

Amazon

suggest that they will weather the current economic, regulatory, and other challenges.

Meta, on the other hand, seems to be genuinely threatened in the near term by several factors that could hurt its revenue and reach. The first is aggressive regulation—new and pending, from the Federal Trade Commission and the European Union, and perhaps even Congress. The second is the impact on its advertising model of Apple’s privacy changes—and the prospect that Google might be following Apple’s example for its Android mobile operating system. The third is the rapid growth of TikTok, as well as a handful of other growing competitors that are siphoning away Facebook’s youngest users and challenging it for the attention of its older ones. And the fourth is that Meta is making a huge bet—to the tune of nearly $10 billion in R&D a year—on building an entirely new business for itself, the metaverse, that might not pan out.

It’s not as if Meta’s competitors aren’t facing some of the same challenges—Google, especially, is facing even more heat from regulators than Facebook. But no other company of its size is facing so many challenges at once.

What this all means, in the parlance of futurists—the kind who teach at universities and are employed by Fortune 500 companies—is that the “cone of possibility” for Meta’s future is unusually broad, compared with tech companies of comparable size.

Exploring the range of possible outcomes for Meta matters a great deal, not just for its investors and the tens of millions of businesses that rely on the company’s services to reach their customers, but also for the billions of people who use them.

At one extreme of Meta’s cone of possibility, the company continues to bleed users, attention and revenue. Then, the final insult, the metaverse it is betting its future on is built by Apple instead, and Chief Executive

Mark Zuckerberg’s

big pivot fails. Eventually, the company is absorbed by a rival, maybe ByteDance, TikTok’s parent. (I realize this sounds highly improbable, but proper futuring is about considering all possibilities.)

At the other extreme of all possible futures for Meta, and one that seems more likely, is that Meta manages to muddle through its pivot to become primarily a metaverse company, after all. Sure, it won’t be perfect. After a dip in revenue, it might take many years for Meta to match what it was able to generate by manipulating its users into using Facebook, Instagram and WhatsApp as much as possible, harvesting the resulting attention, and selling it to advertisers. The metaverse represents an opportunity for Facebook to make money in new ways that aren’t primarily about advertising.

Meta on the skids

Before we go more into Meta’s future, a quick refresher on its present.

In some ways, it’s a grim picture. Apple’s move last year to limit how smartphone data can be used to target ads has hammered Meta’s core business model just as economic and geopolitical uncertainty have broadly hurt the digital-advertising sector. That all led to Meta’s reporting revenue growth in the first quarter that was its slowest since its stock-market debut in 2012. Meta has estimated that the Apple change will cost it $10 billion in lost revenue in 2022 alone.

Overall user growth for its family of apps has essentially plateaued, and daily users of its mainstay Facebook app actually declined in the final quarter of last year. Chief Financial Officer

David Wehner

recently suggested that user growth for that core “blue” app may be over, and that number will bounce around its current plateau of around two billion people from quarter to quarter.

All that has driven its stock down by over half in the past nine months—a far steeper decline than the tech sector broadly.

And there is ample evidence that these headwinds will only intensify.

Google has said it will roll out privacy changes similar to Apple’s that could further reduce Meta’s access to the personal data of approximately three of every four smartphone users in the world. Given that Apple’s privacy changes have pushed ad delivery through Facebook toward Android devices, Google’s changes could be especially troubling for Meta’s future revenue.

Meanwhile, TikTok is siphoning away young people, Meta’s most valuable demographic—and the one most important for its future. In 2020 TikTok surpassed Facebook in the number of minutes its users spend with the app each day, according to App Annie, which gathers data about consumers’ mobile-app usage. Around the same time TikTok became the most downloaded app on the planet, according to analytics firm Sensor Tower.

TikTok’s ad business is just getting going, but by the end of 2022 it is projected to be bigger than

Snapchat’s

and

Twitter’s

combined, and to catch up to YouTube’s in 2024, according to projections by Insider Intelligence.

And yet a Pew survey found that in 2021 TikTok had less than a third of the U.S. users that Facebook did. Collectively, these trends indicate that on both the revenue and user side, TikTok has both tremendous momentum and room to grow. Given the state of the U.S. economy, that revenue growth is likely to come at the expense of other digital media giants, especially Facebook.

Against the backdrop of all this concerning news, it appears Meta’s pivot to the metaverse, while already under way, won’t be completed any time soon. Mr. Zuckerberg has said the company’s metaverse projects will be in the red for up to 5 years, and that some of the technology required to realize his vision could take 10 to 15 years.

Because many of us have lived through the unprecedented rise of new technologies like the PC, the internet, and smartphones, we’ve grown accustomed to thinking that the gap between hearing about some new tech and having it in our hands is short. But that’s generally not how big shifts to transformative new technologies work, says

Andrew Bosworth,

chief technology officer of Meta and head of its VR and metaverse-focused Reality Labs.

Making a virtual- or augmented-reality system people are comfortable wearing for long periods, and which is ultimately no more cumbersome than a pair of eyeglasses, he adds, “is as hard a problem as our industry has tackled in 60 years.”

Uncertain future

As part of its efforts to continue growing, Meta recently started distributing its AI engineers to product teams, rather than centralizing them all in a research lab. While AI is relevant to any number of things the company does, ad targeting remains an important one. Facebook’s ability to micro-target ads—which can make it seem like our phones are listening to us even when they aren’t—depends not just on how much data the company can gather on us, but its ability to use AI to match us to other consumers like us.

Other efforts by Meta include pushing advertisers to build shops within Instagram and Facebook. This effort is in its early days, and some retailers have complained about the results. Retail that happens within Meta’s own sites and apps helps the company to gather the data its AI needs to target ads and complete sales, making up for data lost to device-makers’ privacy changes.

Meta’s costly investment in new virtual- and mixed-reality headsets—that is, ones that combine VR and the real world—will yield many new opportunities to gather data on us, and could even allow even more efficient ad targeting, says Amy Webb, an author, professor at NYU’s Stern School of Business and a self-described “quantitative futurist.”

If people are using a Meta-built headset, the company can’t be blocked by either Google or Apple from gathering all the user data the law allows. What’s more, a headset—which can do everything from recognizing our body language and posture to tracking our eyes and listening to our voice—would grant Meta an unprecedented amount of information about not just where we are and what we’re doing, but also our moment-to-moment emotional state, adds Ms. Webb.

“We are committed to notifying the users any time a new kind of data or sensor will be used,” says Mr. Bosworth. The company is also trying to do as much processing of sensor data on its headsets as possible, rather than sending data to the cloud, which places inherent limitations on how it can be used, he adds. (Apple has touted a similar strategy as a way for it to protect privacy by, for example, processing voice requests to Siri on the iPhone, rather than sending them through the internet.)

With such information, Meta would be able to advertise to us in ways more subtle—and potentially more sinister—than anything we’ve yet experienced, says Philip Rosedale, founder of Linden Lab, the company that built the original metaverse, Second Life.

“In a metaverse, you don’t know where the ads are anymore,” says Mr. Rosedale. “In the real world they’re in squares, they’re in rectangles, you can choose to ignore them. That’s not true in a metaverse. The ad is that person across the street, who isn’t necessarily a real person; they’re an ad.”

It’s still early days for the company in terms of determining how advertising might work in the metaverse, says Mr. Bosworth. He thinks the industry is “getting ahead of itself” by trying to figure this out now.

In many of the same ways television advertising has proven so effective, ads that surround us and with which we might interact without even knowing it could be that much more effective. What’s more, all the biometric data gathered by a headset could rapidly tell Meta’s systems things like your sexual orientation and your mental health status, and sell that information to an advertiser, adds Mr. Rosedale.

Meta stopped allowing advertisers to explicitly target users by “sensitive” topics like sexual or political orientation in November 2021. But the company’s powerful “lookalike audiences” feature uses AI to target people on Facebook who match the demographics, interests and behaviors of people an advertiser has already identified as among its target audience.

As with advertising formats, Meta is also still early in its process of figuring out which kinds of data gathered by headsets are useful for targeting advertising, says Mr. Bosworth. It’s not clear to him that unconscious behaviors are as valuable as conscious ones for that purpose, he adds.

Beyond ads, there is early evidence Facebook is trying to figure out how to make money from the metaverse in other ways.

For example, Meta recently said that it could charge content creators in its metaverse up to 47.5% of the sale price of virtual goods sold through its new sales platform, which it introduced in April.

Mr. Bosworth took pains to distinguish between what the company charges for apps sold in its VR app store, where it takes a 30% cut, and what it charges for sales within its metaverse, which can be accessed through apps purchased from its VR store or elsewhere.

So, for example, if someone accessed Meta’s metaverse through a web browser or a mobile device instead of a Meta-built VR headset—the ability to do so is forthcoming—then something sold in its metaverse would only be subject to an in-metaverse 25% sales fee.

Another model Meta has yet to try but which is enormously popular in competing metaverses is selling virtual real estate. Second Life, which doesn’t make money from advertising, has for years generated most of its revenue from a roughly $20-a-month property tax on each virtual acre, says Mr. Rosedale.

At this point, Meta isn’t interested in trying to make money from virtual real estate, says Mr. Bosworth.

Even if Apple wins the war for which headset comes to dominate the market, Meta still has ample opportunity to make money from its metaverse. Just as the iPhone supercharged Meta’s growth back when it was called Facebook, a stylish and user-friendly VR or AR headset from Apple could prove to be the perfect delivery device for a metaverse-based social network brought to you by—who else, really?—Meta.

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Write to Christopher Mims at christopher.mims@wsj.com