How I Meta Your Verse
Why is Facebook doing so badly?
Meta, the new name of Facebook’s parent company, is not having a good year - its stock is down 70% compared to last year, and it’s at its lowest value since 2016. Given that the company has withstood scandals (election interference, hacks, user privacy issues, genocide), what exactly is going on?
What are stocks, anyways?
“Stock” is, in general terms, a small piece of ownership in a company. The reason why these stocks are created is that it’s a good way to raise money: give people a small chunk of your company, and they’ll give you cash in return. This is easier than a bank loan, because banks are usually stingy and demanding with large loans. This only really makes sense for large companies, though, because regular companies can get regular loans pretty easily - as the saying goes “if you owe the bank a million dollars and can’t pay, you’re in trouble; if you can’t pay back a billion, the bank is in trouble”.
The question, then, is exactly how stock prices are determined. The stock market is a market, so supply and demand - supply is “whatever the company needs money for” but what drives demand? Normally, people buy stock either when they expect the company to be doing better in the future (i.e. cash flows) or when they expect the economy overall to do better, which is good for companies in general; and sell stock when they expect companies to do worse, or when the economy changes in ways that are going to be bad for the specific companies. For instance, if the market expects a recession, then companies related to construction are going to do very badly, because construction is particularly sensitive to the economy.
According to a (not uncontroversial) theory called the Efficient Markets Hypothesis, all relevant information that’s publicly available about a company’s value is incorporated into asset prices - meaning that as soon as news that affects either the economy or cash flows drops, it’s incorporated. Since new information isn’t predictable, unless you know something everyone else doesn’t, you can’t actually make money by actively managing your portfolio - a “monkey with a dartboard” would beat any Wall Street manager over the long term. The most important distinction is between private information (that only insiders know) and public information (that everyone can find out); private information can actually lead to profiting from trades.
Death of a Salesman
So what’s going on with Meta?
The first thing is that all tech stocks are getting hammered by the markets - in total, the group has lost about 400 billion dollars in market value this year. The reason why is roughly, that the economy is much weaker due to higher interest rates, and tech companies have historically been big borrowers - so they’re having a bad time. It’s not especially clear why, but it might be that investors are more risk averse during hard times and that tech companies haven’t been the best bets lately - for reasons unrelated to the macroeconomic environment.
In that regard, it just seems that traditional big tech has exhausted a lot of its possibilities, with most companies in FAANG (Facebook, Amazon, Apple, Netflix, Google) plus smaller players like Twitter/Snapchat or more traditional ones like Microsoft having weak revenue or growth or both this year (actually I talked about Netflix way earlier this year). The general gist of this is that most of those are built on really old infrastructure, and their userbase leans whoever was using it ten or five years ago, but young people are migrating en masse to TikTok. Neftlix has issues related to running out of content people want to see because it’s getting cannibalized by other streaming services. And Apple, Amazon and Alphabet can’t really find new sources of revenue except selling more ads on their platforms.
Meta is doing much worse than the others, meaning that it’s also Meta-specific factors. It’s not scandals or regulations, because there hasn’t been much in that regard, and it’s not TikTok, because other social media sites, and YouTube, are hemorraghing users to them and yet they haven’t dropped by such a staggering amount. To counteract TikTok, they’re also planning on redoing the entire Facebook algorithm and pivoting Instagram towards TikTok-y content1. The big difference is that Meta is making one specific bet for an ungodly amount of money: the Metaverse.
Marky Meta
As you can see above, Meta is spending 250 billion dollars over ten years on the Metaverse - roughly as much as the Apollo program cost, the full cost of Tesla every year, or ten Manhattan projects. And yet, rather than electric cars or nuclear bombs, they made a terrible virtual reality app where people didn’t have legs until two week ago. What the hell is Marky Mark thinking?
The Metaverse is kind of baffling but, in general, it seems like they’re trying to build a platform so that everyone can put on VR headsets and be transformed into a cartoon version of the real world where they do all the same things they’d do in the real world, except you pay extra money to do them because you’re using a VR headset. What?
I’ve talked about crypto recently, and the Metaverse was part of that. I also recommend this very long and equally good article from Bloomberg to catch up. In general, the whole point of the new “crypto economy” can be summed up thusly: you can make up something of arbitrary value that’s scarce, and offer it to people, and some will pay money for it and it’ll become valuable. So you can have huge amounts of money being spent on fake coins you can’t use anywhere, or digital certificates for pictures of monkeys, or whatever.
The Metaverse sort of plays into that: the point is that if you make an online world where people can blow money on random things that make them feel important/special/unique (for example, being neighbors with Zendaya or Bella Hadid on the metahood2), then some people will because there might be a weird speculative market behind that eventually. And while trying to scam people who’ll buy anything that has weird buzzwords on it into investing in a Ponzi scheme is as legitimate a business model as any other, the entire crypto economy was worth a couple trillion dollars last year, so it’s not super plausible that Meta will make (more than) 250 billion out of what amounts to a very over the top version of an NFT.
Another possibility is that they want to treat this like entertainment, and it’s a reach. The largest video game franchise of all time, Pokemon, has made about a hundred billion dollars over the decades, almost three quarters of which comes from merchandising and the like. The single best selling video game of all time, Minecraft, is pretty similar to the concept of the Metaverse proper (except actually fun), and it’s sold 238 million copies over ten years, so it’s probably feasible - and something like Wii Sports has sold 87 million copies, and it’s just the default way to use a Wii. Meta could pull it off, then, if they made the ‘verse fun.
But it’s not clear Meta wants to make an entertainment product, but rather, something loftier. Ruling out some weird psychodrama where Zuckerberg is having a midlife crisis and is trying to invent the next big think (which Meta says is basically their goal), the likeliest reason for why Marky Z and the gang think this isn’t a ridiculous Ponzi scheme is something called web3.
WebWebWeb
What the hell is web3? It’s the kind of thing crypto advocates talk about while nobody normal understands a word that’s being said3.
In general, the Internet has gone through 2 stages: web1, where the entire thing was self-curated websites and chatrooms; and web2 (current one), where big companies own the places everything is done in and tell you what you can and can’t post. Web3, advocates say, is the next step of evolution: while web1 was weirdos running their own little things for free, and web2 was different weirdos running everything for lots of money, web3 will use the infrastructure of the crypto economy to make it profitable to run the internet like web1.
Throwback to the crypto post: cryptocurrency is both a form of money, and a form of storing information about money and transactions that doesn’t require big centralized intermediaries. If you can make money by being on web3Tube, you make it by TubeCoin, and not by getting the YouTube algorithm to give your bank money. And because you use TubeCoin to earn, the bigger web3Tube is, the more valuable TubeCoin is, and the more valuable being there is - the users become the stockholders, in a way, so participating is actually profitable. Basically, the idea behind web3 is that the future of the internet will be new platforms where 1) you can participate (as a consumer or a creator) for a “financial stake”; 2) this stake becomes more valuable the more people use the platform; 3) this means all platforms should have growth incentives and the marketplace would be competitive. Of course this is just turning the entire internet into speculative bubbles and Ponzi schemes, but it might work. Or not. Who knows.
In the past, the content was used to sell stuff: Executives from manufacturing companies got their TV channel buddies to produce Soap Operas in order to sell more soap. But today, content is not used to sell anything beyond itself. Everything is content, including your actions and behaviors. Why give them away for free?4
So while web1 was Hobbesian, and web2 was Foucauldian, web3 will be Baudrilliardian: you’ll participate making content to sell content itself, and the content itself will generate currency that supports content making and the platform on which content is made. I’d say TikTok is to web3 what MySpace was to web2: the platform is mostly about selling content, it makes money by keeping you engaging with the content, and people make lots of money by making and selling content. This is all insanely Matrix-like and self-referential, but it’s in a lot of places: Vitalik Buterin, the founder of Ethereum (the second biggest cryptocurrency), wrote a paper about how IDs would work if they were on the blockchain, and people have floated the idea of selling stakes and equity on content through NFTs and the blockchain.
Meta thinks that they can leverage their web2 money and web2 prestige into becoming one of the big web3 platforms: one where you put on a headset and go about your daily life but in a way that makes everyone money, or something. That they’re going to invent the next big platform where everyone does everything is interesting, but it’s deranged to think that the platform is going to be a weird VR version of The Sims where you pretend to go outside and talk to your friends, family, and coworkers.
Conclusion
So is the Metaverse a good idea? No. Is it a good idea after knowing all of what we learned about NFTs, crypto, and video games? Also no. Honestly, it’s just silly and lame, and it’s not going to make 250 billion dollars.
NGL I think that pivoting towards algorithms that work like TikTok’s (aka showing you tons of weird stuff you might like so you keep logging on) would be a good business move, because TikTok is so fun - but also super risky for (formerly) trillion dollar endeavors.
For the boomers: they’re a famous actress and a famous model, respectively.
They’ve actually moved on to web5, which is like web3 and web2 put together, and that’s somehow more than the sum of its parts.
The basic reason why tech stocks are doing badly with increased interest rates is simply that their profits are further out in the future; as interest rates rise, the further out in the future your cash flows are, the more heavily discounted they are.