- With several threats to the future of its business, Facebook wants to start “a new chapter.”
- Investors are unsure it will succeed in its grand metaverse ambitions and employees are confused.
- “Simply put, the market is questioning whether this company is now Yahoo! 3.0,” an analyst said.
Facebook is at a perilous time in its history as Mark Zuckerberg bets his company on uncertain success in the metaverse. Confusion at the company is reminding some of Yahoo. Once the biggest internet company, it faltered amid similar threats and never recovered.
“It’s fair to wonder if Facebook is hitting a Yahoo moment,” said a tech industry veteran who has worked closely with Facebook executives. It’s possible the social-media company may never be as dominant as it was over the past decade, the person added.
Yahoo was the go-to for internet search in the late 1990s and into the 2000s. It was undone by emerging rivals, a sluggish response to changes in digital advertising, and the emergence of Web 2.0. Today, Facebook is looking at its first real new competitor in TikTok, a disruptive new privacy playbook in digital ads, and an explosion of Web3 startups and technology.
These new challenges have been a key motivator for the company’s switch to the metaverse, a digital reality which it says could create a new market for digital goods and virtual experiences. A former senior employee who recently left said Zuckerberg’s recent decisions were made out of fear that Facebook’s “business is plateauing.”
That fear appears to be founded in fact. Facebook in the second quarter of 2022 reported a 1% decline in revenue, its first-ever drop since becoming public company. Advertisers are now looking to cut spending at the company, another first, as other platforms emerge. The idea of the metaverse is not enticing them to spend more on the company’s platforms. And now, the company is pulling back spending and reining in hiring and growth as it looks at what Zuckerberg called one of the most “challenging periods” to date.
Inside the Facebook, staff are concerned these new bets won’t lead to a better business, according to interviews with 10 current and former employees. Those in the money-making parts of the company have also felt confused about their direction since Facebook changed its corporate name to Meta in October, these people said. The company has responded by creating a high-level team to better communicate its metaverse ambitions internally, Insider has learned.
“There’s still not much to touch or look at, much less use, for all of its metaverse proclamations,” a former employee said. This person, and many others who spoke with Insider for this story, asked not to be identified to avoid retaliation by Facebook or preserve relationships in and around the company.
‘They can’t be wrong’
Zuckerberg’s pivot could make Meta a major provider of the hardware and operating system needed to participate in the metaverse. Right now, that’s a distant possibility, and an expensive one. The company lost $10 billion on the metaverse in 2021. That’s a lot of money, even for Facebook. The metaverse is also basically empty right now, with few users and even fewer things to do. Zuckerberg has said the metaverse is a long-term strategy and wouldn’t be fully developed for a decade, at least.
“Facebook has the courage, the capital, and the capability to make it work and to become a major player,” the industry veteran said. “But they can’t be wrong.”
Meanwhile, insiders and investors are worried about the many major challenges in Meta’s present, including looming regulation, competition from TikTok, and internet privacy changes requiring a rebuild of its entire ad infrastructure (the source of another $10 billion expense this year).
“We’re going through a defining period for the company and we’re going all in,” a company spokesperson said. “A lot of people are excited, but they have a lot of questions at the same time.”
Some employees are losing confidence. In a recent internal employee sentiment survey viewed by Insider, fewer employees provided favorable responses to questions about company leadership, their intent to stay at the company, and whether they are proud to work there. The company spokesperson said it is always “addressing employee feedback.”
“Facebook is five minutes ago, and in tech, cultural currency matters more than anything,” Christie Nordhielm, a professor at Georgetown University specializing in data and society, marketing and advertising, said. “The person at the party who feels the need to tell everyone ‘I’m cool,’ that’s Meta.”
A giant struggles to find space in a new industry
Facebook’s shift to the metaverse is meant to give it “a new chapter,” as Zuckerberg put it. One that is not reliant on social platforms and is more ambitious in scope. Even if it means years of nervous investors, stock volatility and tens of billions of dollars in costs as rivals like Apple, Google and Microsoft develop their own metaverse products.
“They’ve bet the farm on the sector of the market they don’t own,” a former employee said.
“There’s nothing certain about Facebook’s success [in the metaverse],” Ygal Arounian, a managing director at Wedbush Securities, said. “It’s still powerful and dominant, but that doesn’t mean it always will be.”
Most of Meta’s more than 70,000 employees work on the company’s long-time products, like Facebook, Instagram, and WhatsApp, along with the ads division that generates almost all the revenue. Internally, there is uncertainty among those employees about what the metaverse means for their work at Facebook.
The company is “messaging the hell out of” the metaverse internally and it’s “the only thing Mark wants to talk about,” according to a former director-level employee who recently left. But that hasn’t translated to many of the employees’ job functions.
Meta’s commerce team, a hot division within the company, explicitly told employees that it wasn’t planning to invest in any metaverse projects until at least 2023, Insider previously reported.
“People don’t really seem to know what to deliver or what to work on because there is still no coherent strategy,” a current employee said, adding: “It’s basically fomenting disorganization and anxiety.”
Facebook is trying to change that, the former director-level employee said. It’s “spinning up teams that are metaverse specific,” including one with leaders that will reach across all groups within the company. It will be tasked with letting people know “there is a metaverse playbook.” Even if one does not actually exist yet, the person added.
The company spokesperson, who as of this month specifically works on metaverse communications, said such a team is not being formed, “as far as I know.” The spokesperson did offer that Vishal Shah, named VP of metaverse last year, is working with “leaders around the company” to communicate “the broader vision.”
The metaverse is undeniably where Zuckerberg’s focus is, the former director-level employee said. So much so that he’s said to be checking out all new product demos with Andrew Bosworth, the new CTO who runs Reality Labs, and personally going over plans and proposals for Reality Labs partnerships.
“If this is what he wants the company to be, he’s not going to leave it to anyone else,” the person said.
Lingering thoughts of Yahoo
Concerns about Facebook’s shift in focus have been percolating since fall and came to a head in February, when the Facebook app for the first time showed a slight sequential decline in its number of daily active users after several quarters of flat growth. Investors were spooked at the prospect of this being the beginning of a slow, Yahoo-like decline. Meta now holds the record for the largest one-day stock drop, which wiped about $230 billion off of its market capitalization. Its shares have inched back up, but remain close to $200, down almost 50% from September.
Keith Hwang, chief investment officer of Selcouth Capital Management, told Insider investors see issues like Apple’s privacy changes, regulation, diminishing growth numbers and constant talk of TikTok all at once, and it suddenly shifts their view of the company.
“All of these things make it seem like a potential Yahoo-like moment, where TikTok overtakes Facebook. That’s lingering in the back of investors’ minds,” Hwang said. “Each one of these issues on its own is huge.”
Mark Mahaney, a top internet analyst at Evercore, said in a February note that Facebook’s stock “implosion” indeed showed “widespread fear about the company’s long-term fundamental outlook.”
“Simply put, the market is questioning whether this company is now Yahoo! 3.0,” Mahaney said.
Insiders, too, wonder. An upper-level Facebook employee who recently left said going the way of Yahoo was a topic of conversation among colleagues. And not just recently, over the last several years. Points of comparison were mainly Facebook’s exodus of high-level talent and an inability to maintain good relationships with partners, like Apple and Google, while failing to create its own platform. The relationship with Apple has been frosty for years, the employee said. Years ago, Apple even forbade Facebook from updating its app more than once every two weeks, asking: “We update iOS once a year – why do you need to update your app so much?” according to this person.
Another former employee pointed to talent at all levels leaving Facebook, its current trouble recruiting, and making Web3 projects like crypto and NFTs look like nothing more than a “vanity play.” That is creating a general sense that the company is past its prime, this person said.
“Its only real value now is in Instagram,” the person added. “They’re heading down the Yahoo path more and more.” Instagram frequently trades places with TikTok as the most downloaded app month-to-month, but TikTok was the most downloaded app in 2021.
The company spokesperson said total headcount is up 23% compared to last year, adding 3,700 net new hires in the fourth quarter.
Pivots like Facebook’s are not new. Amazon, Disney, IBM, and Microsoft all found success in new industries many years after their founding, a veteran social media executive told Insider. But few companies have made such a dramatic pivot.
The executive said the sheer amount of money being poured into the metaverse, or Reality Labs, can be read as: “We know it’s not going to work.”
“With this kind of social tech, you have to invest incrementally and see what’s working,” the executive said. “You build on customer adoption.”
The reason many of the world’s most successful companies started in a garage, or dorm room in the case of Facebook, is because a lack of funds forces founders to make hard choices about where to go next, the executive added. Facebook has almost unlimited funds and seems to be attempting to do everything in Web3 and the metaverse all at once.
For all of Zuckerberg’s trouble with PR and politics, he’s still widely seen as a preeminent operator. And the one who needs to be CEO if Facebook is going to successfully rebuild its ads business, compete with TikTok, and become a go-to player in the metaverse.
“Mark’s got incredible tenacity,” the executive said. “And has the thinking of a founder and the authority inside the company. He says jump and people jump.”
“If they bring in an outsider, they would just milk it for cashflow,” the executive added. “Then they really would be the next Yahoo.”
Forced to build
In an earlier era of the company, one not replete with scandals, an insurrection, whistleblowers and politicians on either side calling for regulation, the company would have moved to simply acquire TikTok, several sources spoken to for this story said.
That was Facebook’s strategy in the past, these people said. In order to stay competitive with consumers, it would seek to buy companies that were already popular, like it did with Instagram for $1 billion in 2012 and WhatsApp for $19 billion in 2014. “You can’t replicate catching fire,” the first tech executive added.
Increased pressure from regulators has slowed acquisitions, though. Now Zuckerberg “has no choice” but to try and invent his own TikTok and build a new future for his company, effectively from the ground up, the executive added.
The company has made nearly 100 acquisitions, almost all since 2010, normally announcing seven or eight per year. It’s done five since the start of last year and even may be forced to sell Giphy, acquired in 2020, as regulators in the UK blocked the deal. The Meta spokesperson said the company is appealing that decision and is seeking to stay the order to divest the company.
Another tech executive with knowledge of the company surmised that, were it not for regulators breathing down its neck, Facebook would have “bought at least 20 companies” in the last year alone.
In the US, regulation is still just a political talking point, but that could change.
“Zuckerberg’s best bet is the ineptitude of Congress,” said Bradley Tusk, founder of Tusk Ventures and a former political strategist who worked for Mike Bloomberg and Chuck Schumer.
A bad track record
Facebook having the money and leadership to go after ambitious new projects is one major difference from the downfall of Yahoo.
“Yahoo didn’t really embrace search as quickly as they should have,” Pascal Gauthier, founder of crypto wallet Ledger and a former Yahoo employee, told Insider. “Facebook is at least trying to do things, even if it’s gotten its fingers burned doing it.”
Trying is not succeeding, though. And Facebook has a history of failing at many things it’s tried. There’s been Facebook Home, Facebook Dating, Deals, Credits, Inbox, Places. There were Original Shows. Commerce and Shop have been big pushes for years and still have not taken off. Attempts to monetize WhatsApp are ongoing. The demise of Diem, formerly known as Libra, its crypto project, is the latest failure.
“Anything they’ve tried to build on their own hasn’t succeeded,” a source with knowledge of the company said.
Unable to buy its way to success, newer companies like TikTok are being given room to rise up and even pass Facebook.
“No matter how big you are, you can always be disrupted by the next technology, or someone doing it better,” Gauthier said. “It’s the natural evolution of tech.”
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