Why Facebook bet everything on the metaverse

Most of the moat-deepening R&D failed. Facebook Gaming was a distant third behind Twitch even when Mixer existed, Games got no traction even after Messenger forced it on users, Shops is unproven, and Marketplace works but became a market for stolen goods, dropshippers and escorts.

Then the growth story broke in one quarter. The stock fell 26% in a single day, erasing $230 billion, and for the first time ever the company reported weaker ad impressions, fewer daily active users and slowing advertiser spend at once.

The rebrand followed within a month — a flashy new vision of metaverses and digital frontiers, which is what companies announce when they feel they have no other choice.

The lost audience is the one that built the company: young adults aged 18 to 29, the early majority who grew up on Facebook. Zuckerberg admitted that a decade of broadening for growth diluted the focus until Facebook stopped optimizing for them — and they are now on TikTok, YouTube and Snapchat instead.

The copy worked completely. Instagram Stories hit 100 million daily active users two months after launch, and 250 million by June 2017 against Snapchat's 166 million. Snapchat Stories still exist and are nowhere close.

But TikTok is not Snapchat, and the content model is different. Stories are private content made for your own network; TikTok and YouTube Shorts are public content you share and discuss — a harder thing to displace, backed by momentum, funding, mainstream appeal and creators Snapchat never had.

The format thesis underneath is real. Online communication went text in the 1990s, photos in the 2000s as smartphone cameras went mainstream, and video once mobile networks got fast enough. Zuckerberg's bet is that virtual reality is what follows video — and that Facebook should own the format rather than wait for Google or Apple to create it.

The deeper reason is that Facebook is tired of being a services company. Instagram, Facebook and WhatsApp are all internet services with mobile clients. Facebook controls none of the hardware, operating systems, browsers or search engines people use to reach them.

Its actual product requires more data than anyone will give it. To predict what you will buy before you know it, birthdate, city, ethnicity and relationship status are nowhere near enough — you need tastes, lifestyle, behavior, routine, how someone thinks and acts.

Apple and Google both permit less than that, and not out of virtue. They hoard user data too, but they maintain just enough privacy to keep users comfortable buying iPhones and Androids and returning to search and YouTube. Facebook would rather there were no privacy at all — and engineers around the policies, which is why the device makers started drawing the line.

Then one iOS setting did more damage than any regulator ever has. With iOS 14, a single tap permanently blocked in-app tracking. Targeting accuracy collapsed — lipstick ads aimed at young women landing in older men's feeds — and unpersonalized ads get tuned out like highway billboards. Fewer clicks, lower ROI, lower ad spend.

Facebook reported a $10 billion decrease in profit from iOS 14 and is undertaking a multi-year rebuild of its adtech to work with aggregated, anonymized data. Going from exact individual data to imprecise aggregates is an enormous change to a business built entirely on precision.

So the metaverse is an escape from the App Store, not a fantasy. Facebook is too smart to fight Google and Apple on smartphones — that device is lost. Looking at what remains: Microsoft owns the OS and consoles, Google owns search, video and the browser, Apple owns watches, headphones and laptops.

Virtual reality is the only personal device category nobody owns yet. Whether people will one day use VR the way they use smartphones is genuinely unknown — but it is objectively a better bet than competing for scraps against entrenched winners.

The point of owning hardware is owning the rules. Zuckerberg doesn't want to be another app in someone else's App Store — he wants to be the App Store, in a fully controlled environment where Facebook sets its own privacy and content policy and gathers whatever it wants. No more iOS 14.

However ridiculous it sounds, this is a genuine business play rather than a billionaire's daydream. It is a company trying to protect its advertising future from Google and Apple before it is too late.