Meta Posts Multi-Billion Dollar Losses For Its Reality Labs Division

Meta’s bet on the metaverse and VR has become a pricey one. In today’s Q1 2023 earnings report, Meta has shown just how expensive this division has become. Reality Labs, the division of Meta responsible for the development of its Meta Quest hardware and VR/gaming tech has posted its second-biggest loss so far. Meta has posted a $3.9 billion operating loss in the first 3 months of 2023, compared to $2.9 billion in 3Y 2022. 

According to Meta’s earnings, the division only generated $339 million in revenue. Analysts expected the division to generate $613.1 million against a loss of $3.8 billion. Meta included a statement in its report, stating they expect to continue to lose money on Reality Labs through the end of 2023. “We continue to expect Reality Labs operating losses to increase year-over-year in 2023”.

Reality Lab’s revenue has shrunk over the past few years, while its operating costs and losses have only increased. While revenue for Q1 2023 was 339 Million, the prior year Q1 came in at 895 million. In an earnings call today, Mark Zuckerberg reiterated that Meta would continue to invest in Reality Labs and the metaverse, combining metaverse tech with AI. 

The metaverse has proven to become a costly bet for Mark Zuckerberg, who shifted his company’s focus to virtual reality. According to Zuckerberg, the division will continue to lose large amounts of money in the coming years. In 2021 and 2022, Meta spent over $10 billion, investing in its Reality Labs division to the ire of wall street, and it is likely this year’s spending will top previous years. 

Interest in the metaverse erupted with the NFT and crypto craze of the last 2 years. Big banks and consulting firms estimated that the metaverse would be worth trillions of dollars by the end of the decade, however, reality has begun to set in. Earlier this year, Meta announced thousands of job cuts which also hit its Reality Labs division.

The “metaverse” refers to virtual worlds where people could interact with each other’s avatars. So basically, any RPG game that has come out in the last 3 decades. Roblox, by definition, is the metaverse, and so is Minecraft. However, the buzzword of the metaverse began during the pandemic, a time when the future of work and interaction went into question. 

The push for the metaverse was spearheaded by trend-chasing VCs who had little understanding of the gaming market, touting their portfolio companies as the next big thing. We saw the rise (and fall) of NFT games, NFT/metaverse gaming consoles, and even big publishers joined and left the craze. 

Meta’s own metaverse, called Horizon Worlds is an exclusive game for the company’s own Meta Quest headsets. Despite the company’s multi-billion dollar investments in the division, Horizon Worlds has a flailing user base. Horizon Worlds only has hundreds of thousands of active players, with only 1 in 10 players returning to the game. 

Meta’s losses in its Reality Labs division show just how departed the company’s management is on gaming. We see no future where these losses can be offset. For reference, the entire VR gaming market is worth less than Meta’s yearly losses in its VR division. The division will continue to lose money, and we do not know when, and if Reality Labs could even become profitable. 

Meta posted blowout earnings outside of Reality Labs. The company posted revenues of $28 billion, well above expectations. However, it should not be ignored that the company’s metaverse bet is a failing one, no matter what, and companies in gaming and in tech who continue to invest in the metaverse will find that it is an endless money pit. Gamers themselves are not interested, or else VR gaming would be a much larger market.

There is also one more headwind for Meta. Apple plans to release a high-end VR headset sometime this year. Meta’s Meta Quest headsets are already struggling both with sales and user retention. Earlier this year the company cut the prices of the Meta Quest headsets among poor sales. Apple entering the field may just be disastrous for Meta.

So what’s next for Reality Labs? The company continues to invest in gaming content, with over 150 games coming to Meta Quest devices. Consumers are not interested in Reality Labs offerings, and newcomers like Apple have the potential to take the crown in VR/AR/metaverse hardware and content. The concept of sunk cost fallacy rings true, and it seems like Meta should cut its losses sooner rather than later.