Meta Betting the Company on Success or Failure of Metaverse

Andrej Karpathy was interviewed by Lex Fridman and one of his many key points was that Teslabot is not setup for zero or one loss function. Andrej means that the business model is not set up where a lot of money is invested and it does not take complete capabilities for Teslabot to be a financial success.

This was the case with autopilot and full self driving software. Full self driving is still in beta but the Tesla self driving program is already profitable. Tesla has sold over $5 billion of full self-driving software. Tesla defers the accounting recognition of 50% of full self driving software sales. Tesla has about $2.8 billion of deferred revenue. This means that Tesla could have in the range of $5 billion of full self driving sales. There is also deferred revenue from Cybertruck and Semi deposits.

Tesla also has many billions in autopilot sales and sells the cars including the cameras and hardware for autopilot and self driving for an overall gross profit of 30%.

This is something that Elon Musk has down with SpaceX as well. The reusable boosters were tested as part of profitable satellite launch missions. The boosters would normally be destroyed but SpaceX tried to land them after they had successfully completed profitable missions.

Waymo and Cruise are competing in self driving and Waymo started before Tesla on self driving. Waymo makes a few million dollars on self driving ride sales.

In mid 2022, Cruise has $3.7 billion in cash at the moment and a $5 billion credit facility from GM’s financial arm for buying automated Cruise Origin EVs from the automaker. Cruise has quarterly losses of $500 million.

Aurora Innovation, a startup co-founded by Chris Urmson, Google’s former autonomous-vehicle chief, has lost more than 85% since last year and is now worth less than $3 billion.

Ford funded Argo AI and Ford had to write off $2.7 billion when Argo failed.

Meta (Facebook) is betting the company on the success or failure of the Metaverse. Meta has spent $9 billion in the first 9 months of 2022 on research and development of the Metaverse. Meta has also increased property and equipment spending by over $9 billion just in the last 3 months and they used almost $10 billion of debt for this purpose.

Reality Labs is where Meta is researching the Metaverse. They will increase operating losses to reach profits from the Metaverse.

At Connect 2022 this month, Meta announced the Quest content store has surpassed $1.5 billion in purchased VR content since its launch in 2019, representing continued but decelerating growth likely due mostly to market seasonality.

In Mid-2022, Meta’s Quest 2 headset eclipsed 14.8 million units sold mark according to new data provided by the International Data Corporation.

Overall spending on video games (in general not just VR) in September decreased four percent year-over-year from $4.26 billion to $4.07 billion. Spending on video game content dropped seven percent from $3.68 billion to $3.41 billion, while video game hardware sales increased 19 percent percent from $410 million to $490 million.

Sony, Nintendo and Microsoft have video game and content sales that are several time more than hardware sales. Meta has hardware sales for their VR headsets but almost no software and content sales.

Nintendo is a US$52 billion company. Facebook could by buying Nintendo instead of making the Metaverse investment. Sony has a market cap of about US$85 billion. Nintendo makes about $8 billion per year in profit. Sony makes about $11 billion per year in profit.

Tencent owns Supercell which makes Clash of Clans. Tencent is the leader in video game revenue. Tencent is the world’s largest video games publisher. They makes with League of Legends and PUBG Underground. Tencent also has enterprise IT services including cloud computing and AI, as well as financial services. Tencent’s metaverse strategy to focus first on games, but then expand into other fields.

Apple will soon be introducing a VR headset.

VR seems to be extending existing competition in video games and video conferencing. This is like IMAX and 3D movies were extensions of regular movies.

All of Meta’s spending does not guarantee that they will be the long term winner in VR headsets or VR games.

Meta and Zuckerberg should have spent the time to figure out a profitable path to competing and developing their version of the Metaverse. They could have gotten stronger in video games by buying profitable video game companies.

Musk figured out profitable paths for reusable rockets, self driving cars and has a rapidly profitable path for humanoid robots.