1 Meta's Metaverse And The Market For Digital Assets

The Metaverse is essentially a series of Next Gen Web platforms Meta has developed

under the Horizon brand to enter, a bit belatedly, the market for digital assets. This vast

market is undergoing a profound transformation of its own, as it transitions from 2 D to 3D.

The new underpinning technology behind these digital assets is Virtual Reality (VR). Avatar

skins sold on MMORPG gaming platforms are one such digital asset. Avatars sold under the

NFT brand on dedicated platforms, aimed at specifically spurring the blockchain-cryptocurrency

market, are another such digital asset (see case study)

Monetization Bottom line, the Metaverse is another one of those monetization opportunities

which have brought riches to the IT industry over the last 60 years. There was IBM's leasing

of its mainframe computers, followed by Microsoft's and Apple's licensing of software that

was previously given out for free, then the Cloud's annual subscription payment for apps

we previously bought comparatively much cheaper once every 5 years

The New Product A social media platform is very much like any publishing business,

in that it has not one product but two products: a user product serving users and an

advertising product serving businesses wanting to reach out to their targeted users

through advertising or subscription, each of which requires a distinct service offering

The New Product Market So-called commercial audiovisual companies selling on the

Web digital assets, that is, digital images and videos, have been around for some time.

Probably the biggest among them, Getty Images, already generates some $800M a year of

revenue and is estimated to be worth $5B. Yet, the addressable market for digital assets

can now be much further expanded many times over, by developing entirely new

products and platforms, made possible by a spate of relatively new Internet, Web, and

Cloud technologies introduced over the last few years

The New Technologies Before Meta, the first Metaverse companies, the NFTs, beginning

with Roblox, realized as far back as the mid-2000s that their mastery of the recently

introduced and more powerful Internet network (4G then 5G), Cloud data centers, and

user-friendly programming tools would enable them to develop a more complete market

offering (see Technologies page)

The New Product Market Channel As a market challenger, the NFTs developed a platform

for digital assets that could not only distribute and sell them downstream but also provide

upstream the self-service no code tools for users to create their own original digital assets.

As a market incumbent, to not let such an opportunity slip by, Meta retaliated by

launching its Metaverse platforms. A bit brashly, with a $40B spending budget, it bet that it

could leapfrog the NFTs and take over the digital assets market altogether

2 The Misnomer: NFTs Are Not Digital Assets

Price NFTers' insight was that if they could package and label digital objects as works of

art, giving customers the impression that they are worth much more than what they're

really worth, they could charge a much higher price. Finding a way to guarantee the

"authenticity", uniqueness of these works of art was therefore absolutely key. They did

not need to look very far to find it, since the cryptography technology powering their

own platforms, blockchain, was ideally suited to generate and assign a highly secure

unique digital signature, the NFT token, to each digital object they carried

Product So that users can make the most original digital objects, they put at their

disposal the learning and tool kits, which have been extensively used by the online

gaming industry and movie studios to make their 3D animated cartoons (since Toy

Story in 1995) and 2D/3D AR/VR  digital objects. One such digital object, an extreme

case, was a collage of 5000 jpeg images put together by the artist Beeple, which sold for

$69M at a Christie's auction

Place The smaller NFT platforms operate either as developer platforms where users can

create their digital objects, or as buy-and-sell marketplaces . The bigger, more established

platforms, like OpenSea, operate both

Promotion One is always in awe of how the NFTs have so effectively advertised on the

Web, receiving billions of hits on Google Search alone. Likewise for Meta's media blitz

The Misnomer The acronym NFT ("non-fungible token") is a computer code, purportedly

unbreakable, generated by blockchain, one of many systems used to process online

transactions. It is not the digital asset itself. Rather, it is the unique number used i) to

identify the digital asset and, ii) most importantly, to make it unreplicable. Another

blockchain acronym is FT ("fungible token"), which differs from the NFT acronym in that

the FT-coded digital asset is replicable, i.e. a bitcoin can be copied into other bitcoins.

Unfortunately, the NFT-coded digital asset can only i) be run on blockchain and ii) be paid

for in cryptocurrencies. In other words, NFT digital asset prices are solely determined by

crypto prices (which have fallen 3-fold) rather than by demand and supply in its own market

5 Meta's Perceived-Value Pricing Model

Pricing Method Meta uses the standard pricing method for online ads, the Cost per

Thousand Impressions or CPM (impressions are full ads shown on a page)

Product Offering Meta has developed a distinct product for each of the 4 stages of what

we can call the customer's own value chain:

. Stage 1 - Advertising This first stage covers the entire ad campaign process, from content

development to ad placement. On the graph, on the first bar, Brand Awareness, we see

a CPM of $3 per thousand impressions

. Stage 2 - Analytics This second stage involves the data collection and analysis on the

customer's customers's buying habits based on their demographic profile. On the graph,

the 2nd and 3rd bars, Video Views and Traffic, we see CPMs respectively of $4 and $6

. Stage 3 - Engagement This third stage concerns the clicks the customer's customers make

to open up the ad or access the customer's website. The customer immediately engages

by making contact, online and/or physically, with his prospects. On the graph, it is

not clearly shown, since it cust across the analytics and as described below, the sales

conversion stages

. Stage 4 - Sales Conversion This last stage is the most important, when the customer's

customers finally make the decision to buy the product. On the graph, on the last 4 bars,

Category Sales, App Installs, Conversions, Lead Generation, we see  much higher CPMs,

respectively of $11, $15, $17, and $25, reflecting the higher prices its customers are

willing to pay for helping them actually make the sale, not just for building up

user awareness of their products (the ads) and providing insights on users' behavior

(the analytics)

Perceived-Value Pricing Kotler calls the type of pricing Meta applies, perceived-value

pricing, where prices are scaled up based on a customer's perceived value. On the graph,

we clearly see that the highest generic value is given when a sale is made, at the final

sales conversion stage

4 Meta's Market Opportunities

If we use Ansoff's product-market expansion grid, we can say that Meta is pursuing,

through the Metaverse, a typical "new product-current market" strategy, by offering its

new products to the 5 current markets, which are its core Social Media and 4

well-established markets it wants to enter, namely the Consumer, Business, Gaming, and

Fintech markets. As listed below, of these 5 generic markets, there's a total of 6 target

markets, 5 of which are entirely new busineses with new economic and revenue models

Meta must put in place and operate:

Meta's 5 Businesses As the table below shows, Meta will have 5 businesses serving

its core Social Media market as well as the Consumer, Business, Gaming NFT

and Fintech markets

Meta's 6 Target Markets The 6 markets Meta is targeting are the following:

. the Social Media market which will continue to be its core business and cash cow.

In the near future, we believe Meta will most likely operate 2 social media platforms

On the one hand, what it calls its "family of apps", namely Facebook, FB Messenger,

Whatsapp, Instagram, will serve a mature market, comprised of users who do not want

to change their habits. With their total customer base of 3.7B MAU users, ad revenue

totaling $117B in 2021, and still room to grow, these platforms will continue to be

nurtured

On the other hand, with its Metaverse Horizon platforms, it is targeting what will be

the 2 most important demographic groups over the next 10 years, the Millenials and the

Gen Zs. The key innovation Meta brings is to provide these younger and more digitally

literate groups of users with the type of easy-to-use no-code/low code tools  to help them

create their own platforms, either as their own social media platforms, or as we saw

earlier with Wendy's, as their own business platforms. There were some 10 000 such

platforms, which it calls "worlds", which have been created since Horizon Worlds was

launched in September 2021.

To the above horizontal approach, Meta has created a number of vertical platforms

to serve the following target markets it wants to enter:

. the Business market, now dominated by Microsoft and Slack. Meta's products are Meta

Workplace and Horizon Workrooms for the Office market, Meta Portal for the Video

and Meta Novi for the Digital Payment market, Horizon Home for the remote work market.

There is also the need to be backward integrated with a Cloud Infrastructure platform, to

compete against Amazaon's AWS, Microsoft's Azure, and Google's Cloud Platform

Part of the broader Consumer Market:

. the Retail market, where physical and online stores seamlessly interact. It is dominated by

Amazon, Walmart, Apple, Shopify, and the major retail chains. Meta's products are Horizon

Venues and Horizon Worlds which is both a socal and ecommerce platform (Wendy's joined)

. the Smart Home and Smart TV market, through its Meta Portal app and platform, to go

against Disney, Netflix and the powerful MSO's such as Comcast and AT&T

. the Gaming NFT market, through its Horizon Worlds platforms and Oculus 3D AR/VR

headset, to go against Microsoft's Acitivision Blizzard online games and Xbox consoles

. the Fintech market, through its Meta Novi product, as an alternative to  Apple Pay and Google Pay

Meta's 4 Revenue Models Firstly, Meta will most likely extend its formidable ad tracking

engine, which in fact tracks users' searches, to help it sell its new Metaverse products, by

adding search features adapted to each of its new platforms, such as a product search

engine on its eCommerce platform, Horizon Venues. Secondly, it will put in place new

dynamic pricing, billing and payment systems, based on the following revenue models:

. the advertising revenue model for its existing family of apps, catered to its core

consumer social media market, from which it generated $117B of revenue in 2021

. the transactional revenue model for its eCommerce platform, catered to the

consumer market, which is dominated by Amazon

. the subscription revenue model for its new products and platforms, catered to the

business market

. a hybrid transactional and subscription revenue model for its Horizon Worlds gaming

platform, in which it will fit its NFT offering, as well as for its Smart home and Smart

TV market

6 Meta's Cash Position

A quick reading of Meta's SEC 10-K filing for 2021 shows in fact that it is still a very healthy

company, able to sustainably generate enough cash to finance its strategic realignment:

Cash Meta's 2021 free cash flow reached nearly $40B. Its cash in hand including marketable

securities was at $48B. Most importantly, had it not spent $45B to buy back its stock, its

cash position would have totaled a whopping $93B. In short, it has more than enough

cash to finance its Metaverse project, in which it expects to invest nearly $40B in 2022

Cash Cow Meta's cash cow, its "Family of Apps" business, comprised of Facebook,

Messenger, Whatsapp and Instagram, still accounts for 98% of total revenue of $118B

with the remaining 2% coming from its "Reality Labs" AR/VR Oculus headset business.

Meta's ad revenue drivers are its 3.7B monthly average users  (MAUs), daily average users

(DAUs), and the DAU/MAU ratio, or more precisely the communities to which they

belong and the amount of commerce they engage in online. The bigger the size of these

communities and the more they shop, the more advertising Meta can sell. This is what

happened in 2021, when Meta's revenue per user, the ARPU, increased by 50% compared

to that of March 2020 during the lockdown. We think that what Meta is aiming to achieve

with the Metaverse is to advertise and sell more to these communities on its commerce

platforms, by transforming what is its franchise, its social media platform, into a Metaverse

platform

7 Zuck's Mea Culpa

The 2022 Earnings Call It took Mark Zuckerberg a year and a half and Meta's vertiginous

70% market cap fall from its peak of nearly a trillion dollars, to admit he may have

gotten quite seriously sidetracked in carrying out his Metaverse project

The Original Metaverse Strategy Yet, in July 2021, when it was first presented, the strategy

he laid out appeared to be very sound. It had 2 key components, namely:

. Metaverse Platform The strategy's main focus was the creation of a Next Gen platform,

which had 2 very clearly defined objectives. Firstly, the new platform would be used to

drastically improve on its 4 existing "Family of Apps" platforms (Facebook, Instagram,

Messenger, and Whatsapp). Secondly, it would be used to ultimately replace them by

its new Horizon platforms. In both cases, the final aim was very simple. It was to use

the Next Gen platform to serve the next generation of users, the Millennials and the

Gen Z's who are set to replace, over the next 10 years, the Baby Boomers and the

Gen X's as Meta's 2 main user groups

. Metaverse Headset The Oculus headset, acquired in 2014 to enter the device side

of the online gaming market, was to be revived, possibly at first to attract gamers to its

Horizon Worlds platform. The headset was in fact designed to be a gaming console (it

came with a joystick), run entirely on VR, a feature that those offered by the market

leaders - Xbox for Microsoft, Playstation for Sony - were yet to be fully equipped with.

It is the technology, Virtual Reality (VR), powering the headsets, not the headsets

themselves, which Meta was interested in. Meta's intention was to go after the Big Prize.

Its advanced Oculus headsets were only to be used as an entry point to penetrate the

broader $100B, 3B user-strong online gaming market which was transitioning to VR. Both

of the market's segments, gaming consoles and online gaming platforms, each generated

in 2021 $50B of revenue, and were expected to double in size by 2028. But due to better

scale and scope, platforms tend to generate better profitability and ROI. Hence, Meta's

coupling of its Oculus headsets with its Horizon Worlds platforms

To the extent that the Horizon platforms appeared to be ready to be used at the

time of the presentation in July 2021 (one could access and use them), one expected

to witness a very quick market adoption, the bulk of the market being Meta's own 3.7B

users with whom it can engage directly at practically no extra new customer acquisition

cost

The Misstep Instead, one had the impression that Meta decided for some reason to center

its strategy on the headsets alone, rather than to use them to promote its platforms, which,

as it rightly laid out in its original strategy, represent the only real source of revenue.

The result has been a sea of red ink. In all, over 2021 and 2022, it spent a total of $28.3B

to generate $4.4B of revenue, all of which came quasi exclusively from the sale of its

Oculus headsets. The markets expected to see at least 7 times more revenue or 7 times

less costs, in order to break the business even after 2 years, and with all of it coming

preferably of course from its Metaverse platforms

The Spillover on The Core Business What made matters worse was to see for the first

timein 2022 a steep 25% drop in the operating income of its core Family of Apps business

versus prior year. This was due quite simply in large part to Meta's misallocation of resources

and of management attention away from its core business, which still accounted for

98% of total revenue.

The Real Risks There are siginificant hidden risks in both its core Family of Apps business

and its Metaverse venture, into which it has poured good money after bad over the last 2

years (hidden risks tend to be ones we initially deny). These risks are as follows:

. Family of Apps Business: like Google, Meta overspent in 2022 on its core business, wrongly

thinking that the exceptional growth it witnessed in 2021 due to the lockdown would continue. Instead, the opposite happened, with 2022 revenue stagnating, both found themselves with a

quite significant cost mismatch relative to revenue. To correct it, both have announced steep

cost cutting measures in their core businesses: i) staff cutbacks in the 10% to possibly 20% of

their total headcount and ii) a downsizing of their data center infrastructure. By next year,

it should recoup the 13% point operating margin it lost due to the overspending. However,

as we explain below under point 8, its renewed performance hinges on ii) its stand on the

App Tracking transparency issue, which would require a complete change of its business

model, ii) on intensified competition from TikTok, which has carved out an entirely new

market segment in video "shorts", requiring a new form of advertising which Meta does

not yet master

. Metaverse Venture: even if the markets are relatively confident that Meta will fix its

core business, they are less so regarding its Metaverse venture. They will need more

tangible signs on Meta's part that it will drive down costs to the ground,  by as much as

86.4% from the $15.9B it spent in 2022 to break even. From a product standpoint, Meta must

develop products where its strenghs are, in platforms, not in devices. It appears to

be struggling to develop its Oculus headset, which contains one 12-chip PCP board,

a camera with weak pixel count and resolution, a bluetooth connection. By contrast,

Apple's iPhone has 46 AI multi-core chips on 2 PCP boards, 3 neural engine-operated

cameras, and 5G connection (see Apple case study, point 9 "The Core Excellence")

In all, had Meta not overspent in 2022 in its Family of Apps business by $13.4B and

in its Metaverse venture by $13.8B, for a total of $27.2B, its operating margin would

have reached $56.0B on revenue of $116.6B. No wonder the markets were angry

The Mea Culpa After announcing a new focus on what Zuck calls "efficiency", reflected

in the massive headcount cuts he made, Meta's stock rallied, regaining $216B of market

cap

8 The App Tracking Transparency Question

Miraculously so, Meta has come out relatively unscathed from its incursion into the

Metaverse. Its core Family of Apps business still accounts for 98% of total company

revenue and the $13B spike in its costs and operating expenses, due to overhiring,

has been addressed by staff cuts, which would bring back headcount to pre-pandemic

levels (after a first wave of 11k layoffs announced at the beginning of the year, another

10K to 15K layoffs are expected to take place)

Likewise, problems it encountered in 2022 regarding the core business's revenue are

for the most part surmountable. These concern a drop in demand due to the recession,

which it cannot do much about, and a drop in the average price per ad which it managed

to offset by increasing the volume of ad impressions and in the near term by offering

a series of new higher value-added ad products better adapted to video content,

particularly short videos, which have become the dominant media format today

User Privacy A third problem, which it claims to be responsible for a revenue shortfall

of $9B in 2022, concerns what it calls, wrongly so in our view, "limitations on our ad

targeting and measurement tools arising from changes to iOS". In other words, Meta is

squarely laying the blame on Apple for giving its users the option to cut their devices off

("opt out") from the type of user tracking on the Web that Meta has been undertaking

without their prior consent, monetizing the very private data collected on them to

produce ads for its customers, from which it now reaps  a cool $115B a year of revenue

Customer Trust However, we feel that the underlying issue behind the App Tracking

spat between Apple and Meta is not about user privacy but about customer trust. The

double digit growth of Apple's rival Apple Search Ads offering on the App Store, which

scrupulously protects its users' privacy, is proof that giving full control to users of their

privacy brings in more, not less business, contrary to Zuck's claim

Customer Satisfaction This goes to show that customer satisfaction, which is what makes

the success of a business, always begins, first and foremost, with building customer trust,

that is customer respect. Everything else, the product, the service, follows from it

Just 2 Questions To Ask? In this regard, there are 2 questions which need to be

addressed by Meta:

. Question 1 To Its 3.7B Users: Do they no longer trust Meta for not respecting

their privacy?

. Questions 2: If the answer is overwhelmingly yes (it should be), what should Meta

do to integrate user-controlled privacy into its user tracking tool

9 The "Great Product" Graveyard

The Ford Edsel, Blackberry's smartphones, Yahoo's search engine, MySpace's social

media platform are among those products which the firms that made them thought to

be "great"

Then better competing products emerged: a Tesla, an iPhone, Google, and Facebook.

The key to their success has been hammered by any marketing textbook, but apparently

followed by very few companies: the winning product is one that the customer, not you,

perceives to be great

In Meta's case, the perception of its 3.7B customers of what a great product is has

changed. They no longer want Meta to do as it pleases with their personal data. Yet,

Zuck continues to not want to listen to them

Maybe he should revisit the graveyard where those once "great products" were dumped

We may be in for another surprise. As reported in this excellent article by CNBC,

Zuck may have already redirected the billions of dollars of spending on the Metaverse

to the new ChatGPT craze. Here's a quote from the article:

" Meta’s largest LLaMA model released last month, for example, used 2,048 Nvidia A100 GPUs to train on

1.4 trillion tokens (750 words is about 1,000 tokens), taking about 21 days, the company said when it released

the model last month. It took about 1 million GPU hours to train. With dedicated prices from AWS, that would

cost over $2.4 million. And at 65 billion parameters, it’s smaller than the current GPT models at OpenAI, like

ChatGPT-3, which has 175 billion parameters."

The board may have to put its foot down and say enough

3 Meta's Competitive Threats

Meta's Competitive Advantage The underlying Open Source technologies (blockchain, 3D

AR/VR, Unix, Java,...) being the same and freely accessible, where the big predators,

beginning with Meta, have a competitive advantage over their smaller NFT rivals is in

both the money and customer base they have:

. their cash holdings in the tens of billions of dollars, generated by their cash cows, can

be  spent to jumpstart product development and to wage a protracted marketing

campaign to wear out their smaller NFT competitors

. their customer base of billions of users are always receptive to try out the type of high

quality products they are accustomed to getting from them

Meta's New Product Lineup Each Metaverse platform Meta has created, under the Horizon

brand, could compete directly against the major Internet companies: Horizon Venues

against Amazon in eCommerce, Horizon Workrooms against Microsoft's MS Office and

Dynamics platforms, and Horizon Worlds in gaming, where NFTs will first be offered

Meta's Current Competitor There are 2 distinct products, which have been developed to

serve this new channel: NFT Blockchain platforms and Meta's Metaverse platforms.

Although both are essentially powered by the same underlying Internet, Web and Cloud technologies as we will see throughout this page, both platforms have developed distinct

market offerings, in order to serve their respective target markets. See point 3 below for

a complete description of Meta's target markets

Meta's Future Competitors It will not be long before the major Internet companies will

come up with their own Metaverse offerings, which they will adapt to their respective

businesses

For example, Microsoft has added what it calls a Metaverse layer to its Office 365 with

Mesh and Dynamics 365 with Connected Space. It has acquired Activision Blizzard for $69B

to position itself in the biggest Metaverse market, the online gaming market. There

is also Elon Musk's buyout offer of Twitter for $43B to enter the Metaverse market

Even if Meta has developed its Metaverse products, it still needs to develop the businesses,

still relatively new to them, around its Horizon Venues platform to compete against

Amazon's $468B eCommerce business, around its Horizon Workrooms platform to

take on Microsoft's $168B Enterprise business, around its Horizon Worlds platform to

go against the entire MMORPG gaming industry, around its Smart Home Meta Portal

platform to go against the Smart Home/Smart TV industry

Meta will go after that part of the market which has not yet been tapped, but so will these

companies

Social Media Market

(market Leader)

SOCIAL MEDIA

Facebook, Instagram, Messenger,

Whatsapp

Elements Of Meta's Business Strategy

Consumer Market

(market Challenger)

RETAIL

Horizon Venues*, Horizon Worlds*

SMART HOME & TV

Meta Portal***

Business Market

(market Challenger)

BUSINESS

Meta Workplace**

Horizon Workroom*

Horizon Home (remote work)

5 Generic Markets, 6 Target Markets, 7 New Products, 4 Existing Products

Fintech Market (market challenger) Meta Novi**

Gaming NFT Market (market challenger) Horizon Worlds*

All Horizon Platforms

Millenials (Gen Ys), Gen Zs

Baby Boomers, Gen Xs

Targeted Demographic Groups:

*   oculus.com (combined VR headset and Horizon apps)

**  workplace.com, novi.com,

*** portal.facebook.com

MAKING THE SALE

Customer Engagement & Sales Conversion

(higher CPM)

a sale increases customer value

CREATING THE BRAND

Advertising & Analytics

(lower CPM)

the brand increases customer adoption

Meta Case Study

Table of Contents

1. Meta's Metaverse and the Market for Digital Assets

2. The Misnomer: NFTs are not Digital Assets

3. Meta's Competitive Threats

4. Meta's Market Opportunities

5. Meta's Perceived-Value Pricing Model

6. Meta's Cash Position

7. Zuck's Mea Culpa

8. The App Tracking Transparency Question

9. The "Great Product" Graveyard