Meta doubles down on its risky big bet

Is Mark Zuckerberg a visionary who has correctly identified the Next Big Thing in tech? Or was Facebook — despite the skill with which Zuckerberg developed it — a one-off success that will be hard to replicate? The share price implosion at what is now called Meta reflects scepticism over whether pressures on its core businesses can be offset soon, if ever, by the founder’s costly bet on the metaverse, a form of immersive internet. Investors are angry, too, at their inability to constrain Zuckerberg from burning through billions of dollars in pursuit of his goal. They have only themselves to blame. They knowingly bought into a dual-class share structure that allows the Meta boss, with 13 per cent of the equity, to control more than half the votes.

Last week’s brutal sell-off of technology stocks followed earnings that showed just how much inflation and a slowing global economy are starting to crimp growth in their main engines of digital advertising and ecommerce, while even a promising new market like cloud computing is not immune. Investors also balked at spiralling costs and capital spending.

Meta epitomises those concerns, its shares down by three-quarters from a 2021 peak. While Amazon, Google and Apple have developed a portfolio of business streams, Meta still relies too heavily on social media platforms that are facing stern competition for younger users from TikTok. Changes to Apple’s iPhone privacy controls that made targeted advertising more difficult have hit ad revenues at Facebook and Instagram. Meaningful returns from Zuckerberg’s venture into the metaverse look as far off as ever, with the $9.4bn losses from that division in the first nine months of this year expected to be even higher in 2023.

The fixation with the metaverse — a shared virtual space where users can shop, play games, or hang out with friends — is in many ways understandable. Increasing reliance on smartphone platforms has long vexed Facebook as it gives so much power to Apple and Google. A shift to a new platform, in which Meta could be a dominant player, represents a vast opportunity. If it works out, who cares about the odd $10bn loss today? Zuckerberg proved doubters wrong in the pricey looking purchase of Instagram. And the whole point of Big Tech, he has argued, is to be able to spend big on what comes next.

Yet some rivals are sceptical that consumers will ever be ready to don bulky headsets to enter a virtual world, or that sufficient computing power to offer a satisfying experience can be packed into wearable devices anytime soon. Above all, investors are spooked by the size and open-ended nature of the bet. Zuckerberg has been unable to give any clear or credible timetable for when any of Meta’s spending will pay off — whatever investors’ views may be of the metaverse itself. That makes building an investment case hard.

Another feature that separates Meta from some of the other big US tech groups is that it is still controlled and run by a founder-CEO (though Alphabet is still majority controlled by two founders through a triple-class structure). Its board of directors does not provide much of a counterweight. Zuckerberg’s impregnability leaves investors with an essentially binary choice between backing his concept or getting out. The tech boom has made such structures only more prevalent. Giving free rein to the vision and energy of an inspirational founder in a company’s early days can often pay off. Meta is a reminder that as even the most innovative public companies grow in size and maturity, the potential benefits of effective governance and investor safeguards — such as a sunset clause on two-tier structures — only increase.